UnderstandingGoldInvesting

Theviewsexpressedhereinarethepresenter’sanddonotnecessarilyreflecttheviewsofIndianRiverStateCollege,itsfacultyoritsstaff.

ByEricHaave

WhyinvestinGold?• OnethingGoldshouldnotbe:

• AcoreInvestmentoramajoritypositionofyourWealth

• Asanadvisor,IwouldonlyrecommendBuyinggoldif:• Youhavetobuyyourwifejewelry• OrWealthyenoughtomakeitasmall

partofyourInvestmentPortfolio

• WaytoRisky– perfectExample:Return

BuyinAugustof2012atHigh- $1,774oz.SellinJuneof2013(1year)- $1,286oz.-27.5%SellinDecember2016atLow- $1,062oz.-40.0%

WhyInvestinGold?•GoldisagreattoolforDiversifyingorHedgingyourPortfolio

• Diversifying - addinganAssetClasswithdifferentReturnCharacteristics• ValuablestrategyasyourAssetsgrow

andyougetOlder.

• Hedging - investinginasassetthathasOffsettingRelationshiptoCurrentAssets• GoldcanactasanInsurancePolicywhenMarketsareinFluxfromUncertainty

FactorsofUncertainty>>spawnsFear/Panic

• Geopolitics– i.e.: MiddleEastTensions/Wars

• CentralBankStimulus– i.e.:QuantitativeEasing(QE1,QE2)USAandEuropeanUnionexpandedMoneySupply,Debt

• GlobalEconomicWeakness– lessconsumerDemand

• ChineseEconomicContraction- hasbeenfastestgrowingBigEconomy

• InterestRatePoliciesofCentralBanks– manipulationtoControlEconomy

UnderstandingGoldandwhatisbehinditsPriceMoves• SupplyandDemandofGold• GolddoesnothavethenormalcharacteristicsasotherCommodities

GoldactsmorelikeaCurrency– MonetaryAsset

ItsnotConsumedlikeotherCommoditiesi.e.:Coal&Oil(Burned),Wheat&Cattle(Eaten),etc.

SupplyofGold(physical)

• PhysicalSupply ChangesbasedonMininghasnoSignificantEffect• Miningaddsonaverageonly1%tothesupplyeachyear

• MineStrikes(workstoppage)orDiscoveriesaretoominisculetoCountintheOverallPictureofPriceChanges

• ExamplehowsmallitMiningis:• LondonGoldMarkettrades“YearlyMined”Volumein

lessthenaweek.

• ScrapSupply(sourcedfromoldexisting,andmelted)• AlmostallGoldeverminedstillexistsinsomeForm(neverconsumed)

• Again,nothingSignificanttoeffectPriceChanges

SupplyofGold(physical)Charttotherightshows:

From2008to2012(ShadedArea)• PricekeepsincreasingasSupply

fromMiningkeepsIncreasing

• OppositeofOrdinaryCommodityPriceAction

• AsSupplyIncreases,noSignificanteffectonPrice

WhytheSupplyandDemand (Physical)doesn’tMatter?

• ChartonRightshows:

• From2010to2012(shadedarea)• PricesIncreasingasDemandDecreases

• OppositeofOrdinaryCommodityPriceAction

• SameperiodaspreviousSupplyChartshowingincreasedSupplyandPricing

DemandofGold(physical)• Demand(RetailConsumer)– changesminimalandsteady,italsoprovetohavenoSignificanteffectonPriceChange

• Chartasseenonpreviouspage:• Priceinshadedarea(yellowline)increaseswithdecreasingDemand(Blue)

• RetailConsumers(whoisDemand):• Technologyusage

• i.e.:Electronic/ComputerEquipment• JewelryDemand• CoinInvestment• ETFDemand– ElectronicTradedFunds,Fundthatbuys/sellsGoldBullion

TheseSupply&DemandStats(Physical)areUseless!!

• ConsultingFirmslikeThomsonReuters&WorldGoldCouncilonlyprovideGoldsupplyanddemandstatisticsthatareeasytomeasure.

• TheseStatisticsshowlittleSignificanceonTruePriceChangeinGold.

• AnalyzingthisPublicDatacangiveyounoClearPicturetoaccuratelyforecastFuturePriceChanges.

• SowhatdotheProfessionalsEconomicForecastersdo?

TheMostImportantFactoronGoldPriceChangeisINSTITUTIONALSUPPLY&DEMAND• InstitutionalS&Dcanbedefinedas:TradeinGoldBullionbetweenHighNetWorthIndividualsandInstitutions.

• BullionBarsusuallybetween100oz.or400oz.

• Institutionsconsistof:• InvestmentBanks• HedgeFunds– speculation• MiningConglomerates– hedginginventory• CentralBanks• Mints

• LondonisBiggestMarket(NY&Shanghaifollow)forGoldTrading• LondoniswhereGoldPriceDiscoveryhappens• Accountedfor88%ofgoldtradein2015• 90%oftheLondonTradeisSpot(SettledImmediately)• UKhasnoMineProduction,noRefineries

UKnetFlow(Imports-Exports)wegetasenseofWesternInstitutionalSupply&Demand

• IfUKisanetImporter– ImportDemandgreaterthenExportSupply(ImportingPositiveFlows- )LondonisBuying• ThatSignalsanetpullonInventory– PriceHigher(morebuyersthensellers)

WhatweneedtoKnowaboutUKnetGoldFlow

• Inthepreviouschartweobserveanamazingcorrelation.• UK(largestmarket)is• NetImporteronaRisingPrice• NetExporteronaDecliningPrice.

LondonInstitutionalInsiderscontrolthemarket.• InsidersForecastsonUncertainEconomicForcescontrolspriceDiscovery.

Conclusion:NoonecanfighttheInsiders• WhattodowithyourMoney?• IfyouhaveenoughmoneytoDiversifyandHedge,consultyouradvisoranddecideonanAllocation.• HaveaReasontoBuyorSell(short)Gold

• StrongDollarbecauseUSEconomyiswillOutperformWorldCurrencies• Gold– OrangelineBlue- USdollarindex

GoldandEuropeanUnion(ECB)• Goldhasa94.7%CorrelationRatewiththeECBTotalAssets• Strategy->ifyouthinkUSdollarwillbeStronger,EuroWeaker

• ShortGold- andConfirmInvestmentbylookingatUKNetGoldFlows(ImportsminusExports)

Sources:• TheGreatPhysicalGoldSupplyandDemandIllusion• http://www.zerohedge.com/news/2016-10-21/great-physical-gold-supply-demand-illusion

• AretheProductionorConsumptionDriversoftheGoldPrice?• http://www.kitco.com/commentaries/2015-07-21/Are-the-Production-or-Consumption-Drivers-of-the-Gold-Price.html

• TheSixMajorFundamentalFactorsthatDermine GoldandSilverPrices• https://snbchf.com/swissgold/gold/gold-silver-prices/

• MajorFinancialInstituions BuyingupPreciousMetalsinAnticiopationofDollarCollapse• http://www.collapse.news/2016-04-22-major-financial-institutions-buying-up-precious-metals-in-anticipation-of-dollar-collapse.html

• Infographic:LondonGoldMarket• https://www.bullionstar.com/blogs/bullionstar/infographic-london-gold-market/