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Why the rush to buy gold coins shows the way the gold price will go and not the futures market

 -- Published: Sunday, 5 October 2014 | Print  | Disqus 

By Peter Cooper

Thereís a rush to buy gold coins and bars all over the world this autumn. Last week coin sales at the US Mint were running at the highest this year with September sales double the August tally. There was a similar surge in sales of coins and minted bars at the Perth Mint to 68,781 ounces last month with Chinese buyers accounting for 80 per cent of business. The super-rich are stocking up on gold.

In Perth the biggest seller is the one-kilogram bars, which are worth about $45,000 each at current prices. Buyers tell dealers they are buying gold as an insurance against a market collapse. But the other reason that they are buying gold now is the drop in the price to around $1,200 an ounce.

Investment logic

Is this logical? In investment markets most investors are only comfortable about investing after a long uptrend when they can feel really sure about future performance. Sadly that is the madness of crowds speaking and being among the last to invest in an asset class going up is a fatal error.

Could those investing in gold now also be a mad crowd? Well to be fair the amounts of money going into gold coins and bars in Perth and the US Mint are absolutely tiny in comparison to the amount tied up in global stock markets or bonds. It is the rising trend that is interesting, not the amount being invested.

If gold coin and bar sales are up why are prices falling? Thatís a good question. Itís because the price of gold is set in a paper market known as the futures exchange or rather exchanges as they are multiplying particularly in China.

At the moment the US dollar is on an upward tear and that is bad for precious metal prices and all other commodities priced in dollars. How long will this last?

Usually not for very long because unless the US economy has acquired supernatural powers this will make it uncompetitive and deflate the profits of its many multinationals who earn their income in other currencies and have to report it in US dollars. The strong dollar is also a symptom of a weaking global economy outside of the US mainland.

Troubled markets

For holders of gold and silver these can be worrying times. Weaker hands are cashing out in the futures market. That actually leaves the market poised for a spectacular rebound when conditions change direction. Will you be sure to be there if you actually cash out now?

Itís much more than that at risk. If the global financial system goes into a major crisis again then bonds are in peril and the only thing to own in that circumstance is gold and silver as the ultimate money and protector of value.

The rush to buy gold coins shows where the gold price is heading very shortly, not the futures market. This monthís ArabianMoney investment newsletter has a unique idea on how to invest in gold for its subscribers only (click here).


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