Gold bulls owe everything to weak monetary policy, says Adrian Ash
Source: BI-ME , Author: BI-ME staff
Posted: Fri June 3, 2011 4:39 pm

INTERNATIONAL. Take charge and take control, because no-one cares as much as you do about defending your money, says Adrian Ash head of research at BullionVault, the world's No.1 gold ownership and trading service.

In this exclusive interview with BI-ME, Ash points out that Western central banks have boxed themselves into a zero-rate corner. He predicts Gold will attract ever-more cash savings for as long as real rates of interest stay negative both in the ailing West and across emerging markets.

BI-ME: In your opinion, how can investors preserve wealth during this tumultuous period?

Adrian Ash: Take charge and take control. That's what BullionVault enables you to do with gold and silver. Because no-one cares as much as you do about defending your money. As far as the finance industry cares, in fact, it's got "revenue" stamped all over it. Yes, professional advice can be valuable, but don't pay for simple actions you can take for yourself. You'll cut your costs, you'll know it's been done, and you'll better know your risks too. Be watchful and wary, because no single decision is going to keep working forever. You may need to act very quickly as events unfold.

BI-ME: What investments should they be looking at?

Adrian Ash: Right now? Income is dead, so the hope of capital growth will keep pulling capital into equities and natural resources. Longer-term, bondholders are sure to get bashed, if not wiped out – it's how all debt bubbles end. The best bet for growth is always specialist, privately-owned businesses you can study up close, but this "permanent emergency" of zero-interest rates makes mis-allocation a clear risk. Gold will of course attract ever-more cash savings for as long as real rates of interest stay negative both in the ailing West and across emerging Asia.

BI-ME: Gold recently climbed above US$1,500/oz. Do you see further upward momentum or can this be curtailed by the inevitable "sell in May and go away" ?

Adrian Ash: It's been good advice for short-term traders, but if we do get a summer lull in 2011 – and if you're going to try and time it – don't wait too long to buy back. In nine of the last 10 summers, Dollar-gold has dropped 10% on average from its spring high, rising to finish the year higher again in 8 of them. But the average wait from top to bottom was just over five weeks. Only 1 of those lows came as late as 1st August.

BI-ME: What do you think is the next milestone for gold? Will we reach it in 2011?

Adrian Ash: The last price forecast a journalist squeezed out of me was in fall 2010, when I said Sterling gold could reach £1000 an ounce in first-half 2011. Close at £945, but no cigar. The next milestone isn't a number anyway – it's either the next bail-out crisis or first debt default in Europe, if not the start of QE3 in the US. The Middle East remains a wildcard. Because to date, this bull market in gold has jumped on monetary, not political events.

BI-ME: In your viewpoint what are the main drivers of gold’s rise over the past two years?

Adrian Ash: The monetary threat to retained wealth has become all too livid since Lehmans collapsed – a permanent emergency-low for interest rates, unpayable government debts, and a race to the bottom for currencies. Little wonder that private savings have really begun moving back into gold, after ignoring it for nearly three decades. Private stockpiles of monetary gold (bar and coin) now outweigh central-bank hoards for the first time in 100 years. That trend only looks set to continue as Indian and especially Chinese households choose to keep ever-more of their fast-growing savings in gold as well.

BI-ME: The end of quantitative easing will have a negative impact on gold, but demand for oil and industrial metals should be supported if there is real economic growth, Jeff Currie of Goldman Sachs said earlier this week. Do you agree with this broad assessment?

Adrian Ash: There's no correlation either way between economic growth and gold. It fell during the 1980 and 1990 recesssions, but nearly trebled during the go-go years of 2003-2007. What matters is the real return – after inflation – paid to cash, and stick or raise on asset purchases, Western central banks have boxed themselves into a zero-rate corner. Yes, gold bulls owe everything to weak monetary policy, especially as it fuels the transfer of wealth from West to East. But the same is very much true for industrial inputs, including silver. Unlike gold, however, they all sank during the credit-deflation when Lehmans collapsed.

BI-ME: The recent pullback in commodities has been pretty dramatic, do you see this as a buying opportunity? What will be different by September? What does that tell you about the long term trends in commodity trading?

Adrian Ash: It's over 5 years now since John Reade (then UBS, now Paulson & Co.) warned analysts to start viewing commodities as they would gold – as a financial trade, pushed and pulled by the wall of money from big investment funds. Few people noticed, but commodities had broken a 200-year downtrend in 2002. Adjusted for inflation, and barring the price-shock of the two world wars and the 1970s' oil crises, this is the first secular bull run since Napoleon lost at Waterloo.

Now, Dylan Grice at SocGen says it might be a blip, and says you're "shorting human ingenuity" if you buy resource investments. Jeremy Grantham at GMO reckons the cause is Asian growth, crashing into "peak everything". But you can't ignore what happened to monetary policy a decade ago. Interest rates were slashed to all-time lows in Europe and the US, and they fell to zero in Japan. Today we're sub-zero everywhere after inflation, and that makes forward positions in hard assets cost free for big institutions.

Long-term, after the inevitable debt default, real interest rates will have to rise, defending the value of cash at 5% or more over inflation – the historic offer paid during the Gold Standard and again in the early 1980s. But until then, and whether or not we've reached a technological ceiling in resource efficiency, surging input costs and wild volatility look the only certainties.

BI-ME: It was recently revealed that George Soros, who called gold 'the ultimate bubble,' dumped almost his entire US$800 million stake in bullion in the first quarter while John Paulson held his ground. Who do you think has got is right?

Adrian Ash: I can't second-guess their motivation. Soros is a trader. Paulson looks to be all in for the long run.
 
BI-ME: What is the best way for investors to buy gold? (physical, ETF, mining shares etc…)

Adrian Ash: Physical metal, paid in full and held ready for sale, is the only sure route to enjoying gold's unique security, liquidity and diversification. Gold is a singular asset class, and you get very different risks with mining stocks or actively-managed funds. Leveraged products – spread bets, futures, options – should only ever appeal to short-term speculators with definite stops in mind.

In physical bullion, gold coins and small bars held at home create problems of safety, liquidation and cost. ETFs are great for liquidity, but you don't actually own any metal, and being mediated through a trust risks regulatory capture when exchange controls pull the shutters down on cross-border flows. Gold-backed trust funds also cost 2 or 3 times as much in annual management fees as does custody of your outright gold property – including insurance – in the very safest, professional, non-bank vaults.

BI-ME: Can you tell us a bit more about BullionVault services?

Adrian Ash: BullionVault makes the wholesale "spot" market available to private investors – anyone investing a couple of thousand to US$5 million-plus in gold or silver. It's a live, online market, the only bullion market open 24 hours a day, 7 days a week, and the world's largest store of privately-owned gold – well over US$1 billion-worth. We're full members of the London Bullion Market Association, we're backed and endorsed by the World Gold Council, and we've received several major business awards, including the Queen's Award for Enterprise.

There's no credit, no leverage and no shorting. Just physical metal, all pre-delivered, safe and sound inside professional, third-party vaults before you buy, so there's also no risk of counterparty default. Choose from New York, London or Zurich, Switzerland for gold. Your metal belongs to you outright, clearly acknowledged in law, and with the right to take possession if you wish.

Gold storage runs as low as 0.12% per year at BullionVault, with insurance included. We eat by charging customers a small dealing fee each time they trade. It starts at 0.8%, and runs down to 0.1% and below for more active traders. You get direct access to the trading spread, quoting your own prices or accepting quotes from other users as you choose.

BI-ME: Thank you Adrian.

Note. Adrian Ash runs the research desk at BullionVault, the world's No.1 gold ownership and trading service. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes.

Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern and FT Deutschland; Italy's Il Sole 24 Ore, and many other respected finance publications.

For more information, please visit BullionVault.

 

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