As fear and uncertainty stalk markets, the world turns to gold
By GCRU Gold News on Monday, February 29 2016, 22:52 - Permalink
Paul Beesley, senior manager at Baird & Co, said the bullion merchant, run from a high-security warehouse in east London, is "busier than we have been in some years". He added: "We have seen a particularly large rise in private individuals making multimillion pound purchases of physical gold."
Commerzbank said in a recent note that, since the beginning of February, "more gold has flowed into the ETFs than was withdrawn in the whole of last year. Inflows amounted to about 50 tons in two days -- this is the sharpest two-day inflow since the Greek crisis first flared up in May 2010 and equates to roughly six days of global gold-mining production".
Then there is the "paper" gold market, which encompasses the derivative contracts that financial investors use to bet on the price without taking possession of the metal itself. Amanda Van Dyke, fund manager at Peterhouse Asset Management, pointed out that the ratio of financial bets has exploded far beyond historical norms, especially over the past six months.
For each ounce of physical, deliverable gold that is registered with the Chicago Mercantile Exchange (the key market for gold contracts), investors have claims over another 542 ounces, a record level.
Van Dyke said the spike is distorting the gold price because for each derivative contract
which is a bet on the price going up or down investors will also hedge their position in case the opposite occurs.
"Those hedges can push prices in different directions," she said. "A comparison is mortgage-backed securities, when the proportion of derivative contracts was exponentially higher than the underlying actual mortgages they were built on. We ended up having a financial crisis and the majority of those contracts had to be painfully unwound."
She added: "I don't want to forecast that kind of doomsday here, but in the past two years the ratio of contracts has multiplied, and the number of registered ounces has fallen hugely, leaving the ratio at unprecedented levels. It is cause for concern."
If that system were to break down, the "true" higher price of gold could be revealed, she argued.