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Metals With McGuirk: Shifting Dollars to Gold


...any material attempt to shift dollars to gold would cause severe price dislocation in the gold market.


G'day all. I spent this arvo sitting around with the Luscious Lisa trying to work out some dates to get across the river and up to New York in the couple of months, as I had a little unexpected windfall today. Bloomberg TV was droning away in the background and some excited head was yabbering on about how the Chinese are looking at diversification of their reserves away from U.S. Dollars. "The Lisa" looked at me and said "haven't you been saying that stuff for years?" (She does read my stuff occasionally and it obviously made an impression.) I said "Yeah, about 3 or 4 years worth!" but I wondered if in fact I had been as vocal about it as I thought I had been.

I went to the "MV Archive" and did a quick little search and found no less than a dozen articles that make mention of this expectation, and WHY, right the way back to March 2004. It was quite an interesting experience reading what was written on given days a few years back. I guess this was another case of Lozza's Premature Speculation. I'm a chronic premature speculator, but hey, better to be early than not at all! Here are a few examples.

Horse and Pony Show , Precious Opportunity?, Wallaby Stew, The Ying and Yang of Life, From Sydney With Love, The Golden Slipper, You Get the Drift?, Manipulation Versus Intervention, Follow the Physical

Editor's Note: More of Prof. McGuirk's articles

On this same theme, I read that a Barclay's Capital analyst said the other day that if the Chinese were to increase their gold reserves to the ECB standard of 15% that they'd require another 6000 or so tonnes of gold. And people are concerned about IMF or German or Italian or French gold sales??? I've said a lotta times that IMF gold would NEVER see the light of day and that Russia, China and other Asian Central Banks would just turn up with a few 747's and take it all with a chuckle. Russia is the economic "wildcard" I think. These guys are smart buggers when it comes to commodities and trading, and they also play hardball as we have just seen with the Natural Gas issue in Europe. I have harped on about their quiet but very deliberate increase in their gold reserves for some time; especially via my old favourite trade of "Oil for Gold" (Which I still reckon is a gimme!!).

I read somewhere else that some dude at some major International Bank reckons that China won't be able to diversify away from the U.S. Dollar into gold because the market is so small. He contends that any material attempt to shift dollars to gold would cause severe price dislocation in the gold market. This is a no-brainer! That is the basis of my whole freaking rationale for owning precious metals the past 5 years. (In fact, true to form I was premature again and bought my first physical gold at $277, on the way down, in 1999.) There are just too many dollars chasing so little metal for anything else to happen. What else would one expect?? The profligacy of the Fed, spewing out dollars everywhere, makes the "price dislocation" a foregone conclusion, IMO. It's just a matter of which Central Bank runs to gold first, and when. It may not be China, it could be someone else or a combination of individuals and official buying. I don't give a toss who it is. Dollars are running at precious metals and there's not enough gold to go around. If you think you have missed the boat and that the move has already "happened" then you are sadly mistaken. This game hasn't even started yet. By dislocation, I'm talking a gold price in the 4 figures and people should not laugh at someone suggesting a 5 figure price!!

I noted at the close yesterday that there were about 10 "red" stocks of the 50 or so I monitor and upon closer inspection it was obvious that someone ditched a gold share portfolio late yesterday. It wasn't a gold portfolio that I would be all that keen on due to the inclusion of the hedgers Barrick (ABX) and Placer Dome (PDG) but they had a fair mix of others. Those notable were Agnico-Eagle Mines (AEM), Bema (BGO), Cambior (CBJ), Eldorado (EGO), Glamis Gold (GLG), Hecla Mining (HL), Meridian Gold (MDG) and RDG. Interesting to me was the absence of either Pan American Silver (PAAS), Silver Standard Resources (SSRI) or even Coeur d'Alene Mines (CDE) so I presume they either continue to hold their silver stocks or that they never had any! HL sales suggests that they didn't have any! Just my speculation and no edge.

It's about time Anglo woke up- they are about 3 years too late. No mention of current hedge-book reduction though. Hmmm. Mark to markets do count.

Gold looks very well supported again at 540 and it appears likely we'll make a new high for the move in the next 48 hours. Much of the Middle East is on holidays this week so there may be a little less physical market action than normal and maybe the paper players can sniff out some weakness which will be very short-lived if at all, IMO. Japan has been good buyers recently and India never really stopped even up above $540. Hmm.

Silver keeps bouncing off 8.75-80 and I continue to look for $10 plus by end of March once the Feb deliveries get analyzed. When I was going through some of my previous scribblings, I found a late 2004 piece where I said that if Silver wasn't $10 by Christmas 05, I'd streak Walker St. in North Sydney. Lisa is off upstairs to find my running shoes and red Speedo's!! I only missed out by 58 cents and silver was only $6.40 when I made that silly statement. But, a bet is a bet and at least the suntan is appropriate for such a venture at this juncture.

Looking for further strength in the HUI but I reckon it is more likely to need a 565 gold price before we see a meaningful move higher to 320ish. A $600 gold price will see us close to 375 HUI by my reckoning..... tick, tick, tick. As usual, I am always very concerned about a decisive pullback which will create nasty rivals and drawdowns for funds. Low delta short term puts should be purchased on spikes to the $552 level. "Wasting" a dollar or so for some protection at $530 should be a pleasure! The physical market will assert its dominance after the initial dummy-spit, and any downward spike should be profitable if managed correctly.

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Now, about this little "windfall gain" today - I own this little private company that I trade gold stocks through and my accountants pointed out to me that there was a "hole" in the numbers of some stocks that were supposedly transferred by my local brokers here to my New York counterparty, way back in 2003. I had a peep, agreed and so we have been investigating said transfer for just on 5 months now. It doesn't help when one of the counterparties no longer exists! Anyway, there was all manner of to'ing and fro'ing and getting answers was like getting blood out of a stone! I will back my accountants anytime and they were adamant we should still have some stock "somewhere." We ended up in the "lost property" department of the Exchange. As we investigated it was apparent that we were in fact owed some stock, we just had to prove it! To cut a long story short, apparently some of the stock went to a wrong account and it slipped past both me and my accountants, in the first instance. The lag in accounting periods for companies here can be anywhere up to 23 months depending on the vehicle. Anyways, the two stocks have appreciated in value as one might have expected with Gold nearly doubling. One is trading at C$0.97 (17c purchase price) and the other is trading north of C$11 ($2.42 purchase price)!!!! I am embarrassed to admit that it happened as it was a simple back-office error on my part, but hey, I'll take it any day.

We have Hong Kong Long's sons with us tomorrow and a big day is planned. My 13 year old godson, Jordan, is a very keen skateboarder and we are off to the Maroubra Pipe. I hope he doesn't expect me to attempt anything as I reckon 37 fractures in one lifetime is enough for this old dog and I'm not gonna tempt fate by even having a crack at it! His other young bloke, Cody, is fascinated by rocks and crystals and so Lisa is taking him to the Chapman Collection at the Australian Museum. Culture? We know Kultcha!

Enjoy the day.


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Position in gold, silver, SSRI, AEM, PAAS

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