News & Views
Forecasts, Commentary & Analysis on the Economy and Precious Metals
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November, 2013


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News & Views is the contemporary, web-based version of our client letter which traces its beginnings to the early 1990s as a hard-copy newsletter mailed to our clientele. The "Big Breakout of 1999" headlined in the November, 1999 issue of our newsletter moved the gold price from $250 to $325 per ounce. It was a major event.

The times have changed, but our mission has not. Simply put, it is to deliver value to our readers in the form of cutting-edge Forecasts, Commentary and Analysis on the Economy and Precious Metals. The very same mission that has been displayed in our banner for over twenty-five years.

Editor: Michael J. Kosares, founder of USAGOLD and author of The ABCs of Gold Investing - How to Protect and Build Your Wealth With Gold.

Let It Be: Fiat Monkees & Golden Beatles
Things that make you go hmmm....

Introduction (by USAGOLD's Pete Grant): As a child of the sixties, the title of Grant Williams' recent article caught my eye. My father was a bit of an audiophile; and really into his music. His extensive album collection included most — if not all — of The Beatles catalog. The Beatles were a big part of my life growing up, as was music from the likes of Bob Dylan, Janice Joplin, The Doors, CCR, Van Morrison and The Rolling Stones.

My younger sister had a couple singles from The Monkees (Last Train to Clarksville and I'm A Believer, if memory serves). So, an entire catalog of Beatles music, versus two pop hits from The Monkees. I don't believe my sister's 45s ever made it to the turntable of my father's high-end hi-fi system. Instead, Monkees music was relegated to the Kenner Close N'Play Phonograph (and eventually an upgraded white and blue portable 45 player).

That was a reflection of my father's music values. Cheap 'poppy' knock-offs were just not his cup of tea. He also never missed an opportunity to remind us how expensive the diamond needles for his turntable were. Vinyl played on the Kenner was never to befoul his system!

My musical tastes, even at a very young age, were more in line with those of my father. I didn't dislike The Monkees per se, I just preferred 'the real deal'. As Williams says, "The Beatles were music's gold standard; the Monkees would be a convenient fiat alternative." I'm a fan of 'real' music, and I'm also an advocate of 'real' money. Williams combines the two into an immensely enjoyable read, with an important message about lasting value.

Williams' musings also parallel some of the recent writings of our own Mike Kosares, about the massive flows of physical gold from west to east. In places like China and India, fiat — in the form of currencies and in the form of paper representations of gold — are simply no substitute for the real thing. So before turning it over to Grant Williams, I'll leave you with one more lyric from The Beatles:

You never give me your money
You only give me your funny paper
and in the middle of negotiations
you break down
You Never Give Me Your Money, The Beatles (Abbey Road)


Reprint Series

by Grant Williams, Mauldin Economics

October 28, 2013

"And when the brokenhearted people
Living in the world agree
There will be an answer, let it be."

Let It Be, The Beatles

"Oh, and our good times starts and end
Without dollar one to spend.
But how much, baby, do we really need?"

Daydream Believer, The Monkees

"But today there is no day or night
Today there is no dark or light.
Today there is no black or white,
Only shades of gray."

Shades of Grey, The Monkees

"Living is easy with eyes closed
Misunderstanding all you see."
Strawberry Fields Forever, The Beatles

Madness!! Auditions. Folk & Roll Musicians-Singers for acting roles in new TV series.
Running Parts for 4 insane boys, age 17-21. Want spirited Ben Frank's types. Have
courage to work. Must come down for interview.

On September 8-10, 1965, this ad appeared in the Hollywood Reporter and Daily Variety, as two aspiring filmmakers, Bob Rafelson and Bert Schneider, inspired by what was to become one of the best and most influential musical films of all time, set about trying to cast the leads in a television show about four crazy kids living the rock 'n' roll lifestyle that the protagonists in the aforementioned film had made so appealing to the masses.

That film was A Hard Day's Night, its stars The Beatles, and the four young men (chosen from 437 applicants) who would be groomed to supplant them in Americans' hearts and minds were Davy Jones, Mickey Dolenz, Peter Tork, and Mike Nesmith. Together, these four part-time musicians and wannabe actors would become The Monkees; and Rafelson & Schneider's plan was to make them bigger than even The Beatles could dream of being. Armed as they were with the power of television entering its golden age, they had the odds stacked in their favour -- or so it seemed.

monkeesIn 1965, the Beatles were the preeminent band in the world and at the very peak of their power. The time seemed right for a knock-off band that would enable its architects to live the high life and create untold riches out of thin air. After all, The Beatles were genuinely talented songwriters and musicians,
and those were in limited supply, even in the 1960s. It was far easier to produce a band that didn't have to rely on something tangible, such as talent, in order to be accepted by the public -- as long as you could sell it to people by capitalizing on The Beatles' success.

That band was to be The Monkees.

The premise was, in the words of Dolenz, to produce "a TV show about an imaginary band ...that wanted to be The Beatles, [but] that was never successful".

The Beatles were music's gold standard; the Monkees would be a convenient fiat alternative.
Interestingly enough, given this week's reference to The Beatles, the word fiat comes from the
Latin fiat, meaning "let it be" (or "it shall be"; but, since Paul McCartney didn't choose that as
the title of his anthem to the assumption that everything will magically work out in the end,
it's not quite as convenient for the purposes of my ramblings).

How did the fiat alternative to John, Paul, George, and Ringo fare? Well, the answer is perhaps somewhat surprising.

Initially, The Pre-Fab Four, Mike, Davy, Peter, and Mickey (it just doesn't have the same ring[o] to it, I'm afraid), were assiduously kept away from the musical instruments they were supposed to play when recording the songs that would, according to Rafelson & Schneider's strategy, sell by the millions and make everybody rich -- despite the fact that they were all reasonably accomplished musicians and, in the case of Nesmith and, latterly, Dolenz, capable of composing successful pop songs.

Jones was chosen to sing lead vocals (something that rankled with the rest of the band, who felt that Dolenz's more distinctive voice was far more likely to set the band apart); Dolenz was picked as the drummer (even though Jones was far more accomplished in that role, but his diminutive stature meant he disappeared behind the high-hat cymbals); Nesmith took lead guitar (even though Dolenz was an accomplished guitarist but had never played drums before); and that left Tork, who picked up the bass (even though Nesmith was skilled in the playing of that instrument) and keyboards.

In short, an alternative to the most successful band of the day was created by parties interested in having a simpler, more lucrative alternative under their control. It was created and configured not with its long-term viability in mind but rather with appearances as the main driver, in the expectation that, even though the level of talent underpinning the band was hardly of the calibre of Lennon & McCartney, it would be enough -- at least for a while.

And guess what? It was.

In August 1966, the Monkees' debut single, "Last Train to Clarksville", was released and Monkeemania was born. The group's network TV show debuted a month later, in September 1966 (in the days when there were only a handful of channels to watch). It was designed to appeal to the teen audience enthralled with the lovable Brits, and so the band's popularity was assured — despite the impracticalities of the project, which were highlighted very clearly in a review that ran in the Washington Post:

The series stars a fearsome foursome in the Monkees, a wholly manufactured singing group of attractive young men who come off as a combination of The Beatles, the Dead End Kids and the Marx Brothers. Critics will cry foul. Longhairs will demand, outraged, that they be removed from the air. But the kids will adore the Monkees .... unlike other rock 'n' roll groups, the boys had never performed together before. Indeed, they'd never even met .... they've been working to create their own sound.

In reality, the Monkees didn't play their own instruments on their debut album (which led to enormous conflict between the band and their producers), but the popularity of "The Fiatles" was undiminished. Their "upbeat, young, happy, driving, pulsating sound" was all that mattered to both their creators and their audience. As long as the masses accepted The Monkees, the talent underpinning their success was of altogether secondary importance.

The following year, 1967, something rather extraordinary happened.

That year, The Beatles released a collection of songs in an album entitled Sgt. Pepper's Lonely Hearts Club Band -- which would go on to be voted the number-one album of all time by Rolling Stone magazine (a position it retains to this day). Meanwhile, another popular rock combo of the day, The Rolling Stones, released two albums, Between the Buttons and Their Satanic Majesties Request; Jimi Hendrix introduced the public to Are You Experienced?; and The Doors unveiled their eponymous debut album, featuring "Break on Through", "The End", and "Light My Fire".

Well, guess what?

The number-one, top-selling album of 1967 was (drum roll, please):

Yes folks, More of The Monkees, featuring "When Love Comes Knockin' (At Your Door)", written by Carole Bayer Sager and Neil Sedaka; "Sometime in the Morning", penned by Gerry Goffin and Carole King; "(I'm Not Your) Steppin' Stone", by Boyce and Hart; and the instant classic "I'm A Believer" ... hot off the pen of Neil Diamond.

Not only that, but if we let our eyes wander down the list of 1967's best-selling albums, we find at number two The Monkees, which included "(Theme from) The Monkees" and "Last Train to Clarksville" -- both ofwhich were writen by Boyce and Hart.

Now, to be absolutely clear, I am not bagging the Monkees -- I happen to love their music — but merely making the (somewhat labored) point that sometimes a fiat alternative to something backed with something a little more valuable, can have its day in the sun and even supplant its intrinsically more sound cousin for a brief period.

But ultimately, over time, something which is real will always be recognized by the masses as superior to something created for superficial purposes -- particularly during times of crisis. For those keeping score at home, The Beatles and The Rolling Stones are second only to Bob Dylan's 11 albums in the top 500, with 10 each, and the Beatles have 4 albums in the top 10 (including, of course, the number-one album of all-time in Sgt. Pepper). The Monkees don't appear in the top 500.

Why do I bring this up? Well, of course, this is one of those weeks when I'm going to be talking
about gold again -- yes, finally! -- and my thoughts were triggered by an article I read in, of all places, the Hindu Business Line.

India's love affair with gold is well-understood in this part of the world and completely
misunderstood in the West -- a phenomenon I have always found fascinating -- but recently
it has become abundantly clear that this disconnect is widening almost daily as the Western
fixation with The Gold Price and the Eastern obsession with The Price of Gold take ever more
divergent paths.

After the recent frenzied activity at the Reserve Bank of India (which, if it had taken place in the USA, would absolutely have been labeled "The War on Gold" by CNN) as they tried every means possible to stop Indian citizens from buying gold (something I documented in "Never The Twain", TTMYGH August 27 2013), I set about thinking why it is that attitudes in the opposing hemispheres are so different regarding the yellow metal.

As I ruminated, a good friend of mine, who has forgotten more about gold than most will ever know, pointed me towards the Hindu Business Line; and there I stumbled upon a couple of pieces by S. Gurumurthy which, rather conveniently, do a lot of the heavy lifting for me.

In the first piece, entitled "Gold: Villain or Saviour?", S. tackles the stark disparity between economists' views of the "barbaric [sic] relic" and the views of the ordinary Indian citizen. And he does so beautifully:

(Hindu Business LIne): Modern economists and the Indian people seem to operate on two different paradigms with regard to gold. In the modern West, gold is more a state asset than a private possession. Gold constitutes just three per cent of family wealth there, but a third in India. Western states, socialist or capitalist, expropriated all private gold during the last century. Even the liberal US outlawed private gold in 1936 and built official gold reserves of over 20,000 tonnes by 1950.

Modern economics views gold as an uneconomic, wasteful, private investment. But traditionally, in India, gold has been the preferred asset of the rural masses who hold 70 per cent of the nation's stocks. Indian gold habits clearly mock at modern economic theories.

So far, so good. Now at this point S. begins laying down a few facts and figures, and as he does so, the clouds surrounding the question of how important gold is to the average Indian quickly start to evaporate:

Market Oracle, a UK-based market analysis and forecasting online publication, captures the relation between India and gold thus: Indians own 20,000 tonnes of gold worth $1 trillion -- almost half of India's GDP. For Indians, gold is not just money or asset; it ensures the financial security and stability of families. It has religious overtones. More than a commodity or money, it is integral to the warp and weft of family life. Investments in gold and jewelry are indistinguishable. Jewelry is the working capital of families; families collateralize it for commercial borrowing.

Some 13 per cent of Indian families, more from rural areas, borrow against gold as collateral; while rural India borrows from the unorganized financial sector, urbanites access bank loans.

The authors of Market Oracle seem to understand India's family-gold nexus better than Indian policymakers. Yet, despite such a paradigmatic difference, economic laws on gold based on the Western experience are continuously being tried out in India. Result: the establishment hates what the people love.

Do Indian policy makers not understand "India's family-gold nexus"? Of COURSE they do -- but gold is the only refuge from inflation for the Indian population; something that just isn't acceptable to "The Establishment", because India's national debt has been run up by politicians amidst a corrupt and totally inefficient bureaucracy, whilst Indian citizens have patiently and painstakingly accumulated real wealth a gram at a time over many centuries. They are not about to give that up.

caotobviousThe Reserve Bank of India (RBI) set up a working group to investigate what every one of its members already knew instinctively (yet more taxpayer money being put to good use), and the conclusion they reached after a year's expensive extensive study was this:

(Reserve Bank of India): Demand for gold appears to be autonomous and a function of several influences and factors in India and may not be strictly amenable to policy changes. Supply of gold, through organised channels can be constricted, but buyers may take recourse to unauthorised channels to buy gold. The share of banks in importing gold has already been on decline over the years. Since it is difficult to vary the demand for gold the policy focus will have to be directed to (i) design and offer gold investors, alternative instruments that may fetch positive returns with a flexibility of liquidity; and (ii) increased unlocking of the hidden value locked in idle gold stocks through increased monetisation of gold. In this context encouraging gold jewellery loans from Banks and NBFCs, ensuring customer protection of borrowers and changes in the practices of NBFCs is desirable.

Brilliant! Welcome back, Captain Obvious!

Seriously, though, this is perhaps the most ludicrous government-funded study since US$3 million was spent on helping the National Science Foundation study shrimp running on a treadmill (no, really).

Back to S. again for some rather compelling numbers:

But, are Indians fools to have invested in gold as the economists would have us believe? No. Actually, gold seems to have fooled the economists. The RBI working group study finds that gold has outperformed stocks and bank deposits in the last five years -- more than three times over Nifty, six times over bank deposits and 10-year government bonds. Only gold, no other asset, has so consistently beaten inflation.

annual returns

cumulative returns

The average inflation during 2001-02 to 2005-06 was 4.7 per cent but gold yielded 9.2 per cent — almost double. The average inflation for 2006-7 to 2010-11 was 6.7 per cent but the yield on gold was 23.7 per cent — three times plus. Average inflation for 2012 is 9 per cent but gold returned 33.5 per cent — almost four times. Traditional India intuitively seems to understand the value of gold.

OK, so here's where we start to get an understanding of how this all works.

Westerners aren't used to the kind of inflation levels, government confiscation, and currency volatility so common in places like India; and so the need to own gold as protection isn't fully appreciated in the West.

Westerners pay lip service to gold's being "an inflation hedge" or "a currency" or "a safe asset", but these terms are used in an extremely abstract way by the vast majority of the investing public, who see gold as mostly just another trading vehicle. Yes, there are Western investors who have a deeper understanding of the reasons for owning physical gold, but they are a tiny minority.

Perhaps the simplest way to illustrate this point is to look at trading volumes in gold ETFs — a
simple, effective way of renting gold for the short term for punters investors — to see how
Western and Eastern volumes compare.

For the purposes of this exercise, there's nowhere better to go than the heavyweight champion
of the gold ETF world, GLD:

etf volume

As you can see from this chart, the average daily turnover of GLD on the NYSE is a little shy of
11 million shares. At current prices, that is roughly US$1,419,127,163 or $1.4 billion. Every day.

Fortunately, the GLD ETF is also listed on the Tokyo, Hong Kong, and Singapore stock exchanges
(and you'd better believe that the reason it is listed is because Asians just luuuuuve gold); so a
comparison is extremely straightforward.

What do the volumes in Asian trading of paper shares offering "ownership" of gold custodied in
the London vault of HSBC look like?

Well, they look like this:

etf asia

Now, eagle-eyed readers will have noticed that I didn't include the average lines for the three Asian exchanges. The reason for that is simple: they are so close to the X axis as to be almost invisible.

To provide a clear picture of the contrast between GLD volumes on the Western and Eastern exchanges, what I will do instead is show the average daily turnover on all four exchanges as dollar figures on the same chart (below).

I actually had to delete the line that demarcated the X axis, because, with a 1pt stroke on it in Adobe Illustrator, it became too difficult to see the bars for Japan, Hong Kong, and Singapore; so the chart looks a little strange.

What's that? The Asian exchange volumes are a little difficult to make out? Ah... well, in that case, let me clarify it for you:

The volume on the NYSE is approximately 700x that of both Tokyo and Hong Kong and a mere
350x that of Singapore.

In short, Asians like their gold to be heavy, shiny, and made of ... well, gold.

etf all

This massive disparity in appetite for "placeholder gold" is just one side of the coin, however; and India is just one of the Eastern countries that has been soaking up copious amounts of physical gold in recent months.

Why? Well, I'll hand it back to S. again, as he finishes his article with something of a flourish:

The economic establishment wails that gold does not obey its policies. Gold defies government policies because of the disconnect between the policies and the people. Indians revere, not simply love, gold. But the State policies are founded on the economic theories of the West which treat gold like any other commodity for trade and profit. It is no surprise that the theories, which work in the West but not here, project gold as India's villain.

Yet, gold has emerged as the winner in economics — successfully hedging inflation and beating the stocks and banks. With the unalterable basic facts about gold in India known, the real challenge is how to frame a practical and workable policy for gold and how to ensure that gold imports do not affect the macro economy. Gold buying by Indians is seen as weakening India. But buying is economic power as well — in fact, the ultimate economic power is a nation's market. Yet, surprisingly, India has not put to use its enormous power as one quarter of the world's retail market for gold. India has to strategise and use its huge market to overcome the weakness of its people for gold. How to do it is the challenge and a topic by itself.

Indeed. How do you get the gold out of Indian citizens' hands and into government coffers? I can
think of one way, but I wouldn't advocate trying it.

The evidence of physical gold's being sucked ever more violently from West to East grew hugely
this past week when figures were released for gold exports to Switzerland through London:

(Reuters): A surge in gold exports from the United Kingdom to Switzerland this year may largely be the result of metal sold out of exchange-traded funds being shipped for rerefining before making its way to Asia, according to Australian bank Macquarie. UK gold exports to Switzerland, Europe's major bullion refining hub, jumped to 1,016.3 tonnes in the first eight months of this year, data from European Union statistics agency Eurostat shows, from 85.1 tonnes in the same period of 2012.... A surge in gold exports from the United Kingdom to Switzerland this year may largely be the result of metal sold out of exchange-traded funds being shipped for re-refining before making its way to Asia, according to Australian bank Macquarie.

UK gold exports to Switzerland, Europe's major bullion refining hub, jumped to 1,016.3 tonnes in the first eight months of this year, data from European Union statistics agency Eurostat shows, from 85.1 tonnes in the same period of 2012.... Asia is by far the world's largest centre for physical gold demand, with China and India between them responsible for nearly half of global gold fabrication demand, which includes jewellery manufacture.

Buying in Asia shot higher in the second quarter of the year after a sharp drop in gold
prices, which spurred consumer demand.

"Given the outflows from ETPs, strong demand in Asia and refining capacity in Switzerland, it is possible the metal is headed for Asia through Switzerland," Barclays Capital analyst Suki Cooper said.

That is a twelve-fold increase in bullion traffic between the primary vault in London and the
major refineries in Switzerland.


Now, we don't know with absolute certainty where that gold is ultimately bound — but we know it isn't Switzerland. If we throw into the mix the widely covered movement of gold into China through HK, a picture begins to emerge of an incredible wave of physical metal heading from West to East, even as the price continues to languish. One of the primary sources of supply in this steady transfer of physical bullion has been the GLD warehouse. I've touched on the subject of the incredible vanishing ETF gold holdings before, but it's worth revisiting the phenomenon and reminding readers of a chart I included in the July 16th edition of Things That Make You Go Hmmm..., entitled "What If?":


This chart shows the precipitous drop-off in both ETF holdings and gold stored in the COMEX warehouses. (I included the Bundesbank's now-infamous repatriation request in this particular chart, but let's leave that little coincidence aside for the time being and concentrate on the "what" and not the "why".)

The gold in London is heading somewhere — and it's heading there via Switzerland, by the looks
of it.

Taking that chart a step further, we find yet more evidence of a major disconnect between the two biggest precious metals ETFs, GLD and SLV. As you can see from the first chart below, the prices of both "monetary metal" ETFs have performed pretty badly so far this calendar year, with GLD falling a chunky 20%:

Source: Bloomberg

The extent of this decline is cited by mainstream commentators as the reason for the hollowing out of the amount of metal held in custody on behalf of the GLD ETF. The silver ETF has fared even more poorly, with its customary volatility pushing it 27.5% lower year-to-date.

Tough times to be a precious metals bull, to be sure.

Now, however, take a look at the total reported physical metal holdings of all precious metals
ETFs. (These figures extend wider than simply GLD and SLV and take into account all the major
competing products.)


Notice anything?

Yes... holdings of silver in ETFs have actually increased as the price has fallen nearly 30%, while
gold bullion in custody has plummeted.

Now, if there's anybody out there who can explain this phenomenon to me, I am genuinely
interested in hearing any and all plausible explanations.

I said "plausible", folks.

This draining of physical metal was always going to cause stresses somewhere in the machinery at some point — it was only a matter of time — and the Indian central bank's "war on gold" seems to have been the final straw.

As the RBI's working group so neatly summarized on page 9 of their 224-page paper:

"Demand for gold is not strictly amenable to policy changes and also is price inelastic due to varied reasons."

Of course, despite the fact that gold isn't "strictly amenable to policy changes" (oh how I love
that phrase), nor does it have any price elasticity, the Indian government went ahead and made
a raft of policy changes designed to curb gold buying.

The upshot?

(Bloomberg): Gold premiums in India, the world's largest user, climbed to a record as jewelers rushed to secure supplies to meet soaring demand during festivals and weddings amid government curbs on imports.

The fees paid by jewelers to banks and other importers climbed to as much as $120 an ounce over the London price this week compared with a discount of $60 a month earlier, said Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation. Premiums may surge to $150 to $200 if the shortage persists, he said.

The raw material scarcity is worsening as imports slumped after the government linked shipments to re-exports in July and increased tax on overseas purchases for a third time this year to curtail demand. Purchases of gold and silver tumbled to $800 million last month from $4.6 billion a year earlier, the Commerce Ministry said Oct. 9.

"There is a shortage in the market and there will be panic in the market with each passing day" if supplies don't increase, Bamalwa said. "The government is comfortable because import of gold is reduced but it's a problem for consumers. Gold is in our culture and we can't change that."

Those final ten words are the key.

There now exists something of a perfect storm in the physical gold market as we move deeper
into the Indian festival season.

Demand at this time of the year in the subcontinent is "inelastic" (as the geniuses at the RBI eventually surmised). The GLD ETF has already lost nearly 35% of its bullion this year; China has been hoovering up as much physical gold as it possibly can (through Hong Kong and, most likely, Switzerland); and we are now set to move into what has been, for the last 40 years, the strongest part of the year with regard to the price performance of gold (driven largely by that Indian festival season).

The chart below shows seasonal gold price performance since 1969. (Although the data stops at 2010, so that there are a couple of down years missing, the pattern is the important thing here.) I have laid the chart out from September to August to better illustrate the phase we are moving into.

October has traditionally been the weakest month of the year, while November through January
has been the strongest period:


To complicate matters further, the supply and demand information available in the always opaque gold market has been questioned this past week by none other than Eric Sprott, who, as he always does, laid out his case simply and beautifully — allowing the numbers to speak for themselves.

In an open letter to the World Gold Council, Eric demonstrated that either the numbers are wrong, or the shortage of supply is enormous. And the reason for these conflicting data points?

Why, demand from Asia.

Of course:

(Eric Sprott): Over the past few years, we have seen incredible incremental demand from emerging markets. Indeed, so much so that the People's Bank of China has announced that it is planning to increase the number of firms allowed to import and export gold and ease restrictions on individual buyers. In India, the government has been fighting a losing battle against gold imports by imposing import taxes and restrictions. Moreover, Non-Western Central Banks from around the world are replacing their U.S. dollar reserves by increasing their holdings of gold.

But, demand statistics reported by the World Gold Council (WGC) consistently misrepresent reality, mostly with regard to demand from Asia.

To illustrate my point, Table 1 below contrasts mine production with demand from some of the world's largest gold consumers. According to WGC/GFMS data, the world will mine, on an annualized basis, about 2,800 tonnes of gold for 2013.

But, I adjusted these figures to reflect mine production from China and Russia, which never leaves the country and is used solely to satisfy domestic demand. After adjustments, we have a total world mine supply of about 2,140 tonnes. On the demand side, I make some in-house adjustments to better represent demand from emerging markets. To proxy for gold consumption in China, Hong Kong, India, Thailand and Turkey, I use net imports of gold, as reported by their various governmental agencies. While imports might in general be an imperfect proxy for demand, those countries see very little re-export of what they import and keep most of it for themselves, so it is not unreasonable to assume that what they import they "consume", on top of their domestic production. To this I add the demand, as estimated by the GFMS, from other countries and that of central banks. I annualized the year-to-date figures and found that for this year, annualized total demand is approximately 5,200 tonnes. On that basis, "core" annualized demand is approximately 3,000 tonnes more than mine supply.


Pretty compelling.

So, how does this all play out?

Well, I've been watching this situation unfold through most of this past year with an increasingly bemused look on my face, because the numbers just don't add up. But so far, despite clear evidence of massive demand for physical gold, "The Gold Price" has continued to trade poorly. However, the longer this situation persists, the more definitely it will resolve itself; and it's very hard to see how that resolution ends in anything but higher prices.

Demand levels from Asia continue to soar while production increases just a couple of percent each year; and leaving aside Indian festivals and increasing central bank purchases, the fiat alternative to gold bullion — the US dollar — is coming under renewed pressure in the wake of the Taper That Never Was and the appointment of Janet Yellen as Ben Bernanke's successor.

Which brings us neatly back to the Monkees and the Beatles.

Although, for a short space of time (in this case, a single year) the Monkees managed to become so popular that they outsold what has become widely recognized as the greatest collection of songs ever assembled on a single album, in due course the record-buying public returned to the gold standard of Lennon & McCartney; and it is the Beatles who, with sales estimated at 600 million records, remain the accepted store of musical value some 50 years after their heyday.

Because there hasn't been any kind of gold standard for the past 42 years, most people assume that it will never happen again; but this chart (which I originally put together a couple of years ago) demonstrates that over the last 200 years the dollar has been on a gold standard of some sort for longer than it has relied on the power of fiat — it just hasn't been that way lately:


But, like the infatuation America had with the Monkees in 1967, this fascination with the fiat dollar will prove to be nothing more than a passing fad; and one day — perhaps soon — the citizens of the West will, like their cousins in Asia and the Indian subcontinent, realize that there really is no alternative to sound money.

The only problem is, when the realization finally dawns, where will all the gold be?


This article reprinted with the kind permission of Mauldin Economics and Grant Williams.

Michael J. Kosares is the founder of USAGOLD and the author of "The ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold." He has over forty years experience in the physical gold business. He is also the editor of News & Views, the firm's newsletter which is offered free of charge and specializes in issues and opinion of importance to owners of gold coins and bullion. If you would like to register for an e-mail alert when the next issue is published, please visit this link.

Disclaimer - Opinions expressed on the website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD does not warrant or guarantee the the accuracy, timeliness or completeness of the information found here.


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