As you should know by now, we’ve got a fairly simple view on gold.
Don’t fuss around with it.
Don’t dwell over when you should buy it.
Just buy it and be done with it.
But that doesn’t mean we aren’t interested in gold and the gold market. From time to time something catches our eye.
That happened yesterday. It reminded us of a way to help tell the end of the gold bear market…and Warren Buffett’s role in determining it…
Yesterday the World Gold Council released its quarterly Gold Demand Trends report.
Given the absolutely brutal performance of gold in recent months, we were keen to flick through it soon after it arrived in our inbox.
To be honest, for most of the past three years we’ve barely paid any attention to this quarterly report. But this time we thought it was worth at least a few minutes of our time.
And we’re glad we did because we were stunned by what we read…
Selling Paper Gold to Buy Real Gold
We’ve cut the following table from the report and circled the key numbers. What it shows you is that total gold bar and coin demand hit 507.6 tonnes during the quarter.
By contrast the demand from gold exchange-traded funds (ETFs) was -402.2 tonnes. In other words, the ETFs were net sellers of gold:
The fact that ETFs were net sellers doesn’t surprise us. Especially when we read the latest news about famed hedge fund manager John Paulson selling half his fund’s holding in the main US gold ETF.
What really stunned us was the size of the physical bar and coin demand. We knew from personal experience that there was a long line the last time we bought gold bullion about three months ago. So the figures make sense. But it still surprised us.
But that table only tells part of the story. It only gives you the numbers. It doesn’t interpret the numbers into useful information. For that you need to speak to a respected gold analyst.
That’s why we asked our old pal Greg Canavan, editor of Sound Money, Sound Investments, to chime in with his take on the numbers. Here’s what he told us:
‘In an ETF, you can only get access to the actual physical gold if you’re an “authorised participant”, which are generally the banks. As a small investor, an ETF only gives you “exposure” to gold. That isn’t the same as owning gold…especially if you find out the “authorised participants” have drained all the gold from the ETF and you can only redeem your gold “investment” in equivalent US dollars. Those stats show an increasing realisation that the recent gold price plunge was more about selling in the paper gold market, rather than the physical gold market.
‘Also, it shows how much actual demand there was for physical when the price fell. The bullion banks (authorised participants) are the main intermediaries in the global physical gold market. The fact they’re taking lots of gold out of the ETF’s means there is strong demand for it elsewhere. ETF’s don’t lose physical metal just because the price falls. That’s not how they work. The silver ETF, for example, has hardly shed any silver even though silver’s price performance has been much worse.
‘So I’d say this confirms that investors prefer real, limited supply physical gold, not abundant paper gold.‘
So, gold has taken a drubbing. Paper gold investors are selling out. But real gold investors are buying in. That’s the important thing. If you’re interested in buying gold at a good price, is now the time?
Gold v Stocks
For the answer to that question we had to turn to another of our old pals, Dan Denning. (We’re happy to admit that we don’t know a quarter of what these guys know about gold, and so we tap their brains for info.)
Some time ago we remembered Dan telling us that he had a different way to most people of judging when it was a good time to buy gold. He doesn’t just look at the gold price, he looks at gold’s relative price.
In this case, the price relative to stocks…and one stock in particular – Berkshire Hathaway [NYSE: BRK/B].
Berkshire Hathaway is of course billionaire investor Warren Buffett’s listed investment vehicle. Buffett is the man who famously says that gold is about as pointless an investment as you can get.
We don’t agree. But that’s by the by. The point is whether gold is now at a price that makes it worth buying when compared to stocks (Berkshire Hathaway).
As Dan sees it, it is. Dan’s view was that gold would find support when it was trading at 14-times the price of Berkshire Hathaway ‘B’ shares (currently USD$116.57 per share), but only after gold had over-corrected through that level.
It’s now at 11.9-times Berkshire ‘B’ shares as you can see on the chart below:
Of course, this isn’t just about the gold price falling. It’s about stocks hitting an all-time high too.
As far as Dan is concerned, as he told us yesterday, ‘Move complete, rally to commence.‘
The hedge fund guys are selling big chunks of their gold ETF positions, and yet the physical gold demand has almost doubled compared to the previous year.
If you’ve put off buying gold for fear it could fall further, everything we’ve covered today could be reason enough to tempt you into the market.
Then again, as we mentioned at the top of this letter, we try not to think about gold too much…we just buy it whenever we feel like it.
From the Port Phillip Publishing Library
Special Report: The Sixth Revolution
Daily Reckoning: Silver, The Devil’s Metal
Money Morning: Two Points to Consider from the Commonwealth Bank…
Pursuit of Happiness: The Next Big Leap for Transportation Technology
Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks