Commentary: ETF's add to global gold demand and allow investors to
participate in the commodities market, but do not provide the safety and
preservation of physical gold assets, nor do they add the additional
portfolio diversification of a hard asset allocation in physical gold.
The Hong Kong Securities and Futures Commission has approved the city`s first gold ETF
The Hong Kong Securities and Futures Commission has approved the city`s first gold exchange-traded fund to meet investors` demand after bullion prices climbed.
State Street Global Advisors, the money-management unit of the world`s second-largest manager of exchange-traded funds, and the World Gold Council will give details on July 24, according to a media invitation sent by Hill & Knowlton Asia Ltd.
Hong Kong wants to bolster its position as an Asian financial center as rivals Tokyo and Singapore offer commodities trading. Gold for immediate delivery has jumped 39% in the past 12 months as investors seek an inflation hedge and alternative assets as global equities declined.
"Gold-related investment products are expected to be well received when inflation remains high as investors are seeking ways to preserve their wealth," Kenny Tang, associate director at Tung Tai Securities, said in Hong Kong. "An ETF makes investment in gold easier and more accessible for public investors. What they need is only a stock-trading account."
The listing in Hong Kong comes after a similar fund started trading in Japan this year and in Singapore in 2006. Hong Kong is also planning to start a commodities exchange in the first quarter of 2009 and will offer dollar-denominated fuel oil contracts for delivery into China.
"We have seen growing investor interest in the commodities market and have been working with industry participants to enable the introduction of different commodities products," the regulator said on July 24 in a statement on its Web site.
The SPDR Gold Trust was approved on July 21, the regulator said. It didn`t say when the fund will start trading.
Hong Kong Exchanges & Clearing Ltd., the operator of Asia`s third-largest stock market, is trying to reduce its reliance on stocks by venturing into commodities. The bourse will start trading gold futures in October.
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Putting the Gold Price in Perspective
The first thing people usually consider when buying gold is its price, but unfortunately, they are grabbing the wrong end of the stick. Price is of secondary importance. To explain why, one has to examine the reasons for buying and holding gold.
The motivation to buy gold is usually driven by the pursuit of some defensive financial strategy. For example, gold is a proven and time-tested inflation hedge, so people acquire gold if they believe inflation is likely to worsen. This defensive strategy aims to protect your purchasing power because with gold you hold sound money instead of some inflating national currency.
Another defensive motivation to acquire gold is its unique attribute of being money with no counterparty risk. This significance of this risk was highlighted by the bank-run at Northern Rock in the UK last year and more recently, Bear Stearns in the US. People withdrew their money from those banks because they recognized that their ‘money’ was only as good as the financial capability of those banks to make good on their promise. In contrast, gold is not dependent upon a promise because it is the only money that is a tangible asset, and not an I.O.U. of some financial institution.
Another reason people focus on the price of gold is because they consider it to be an investment, but it’s not. Investments generate rates of return because you put money at risk, for example, by lending it or buying equity in a company. If the investment is successful, you will generate a return, increasing your wealth. But gold doesn’t do this. Gold preserves wealth; it doesn’t increase it.
For example, one ounce of gold purchases approximately the same amount of crude oil today as it has at anytime over the past 60 years. Who would want an investment like that? Gold hasn’t generated any rate of return. It hasn’t given its holders the opportunity to buy more crude oil. But because you can still buy essentially the same amount of crude oil, an ounce of gold has done exceptionally well at protecting wealth by preserving purchasing power, which is what money is supposed to do.
Money is a temporary store of value where we place a portion of our wealth while we decide whether to spend, invest or save (hoard) it. So when we hoard gold, we are in fact saving money until that moment in time when we decide to spend or invest it, which brings me back to my basic point.
Does one question the price (i.e., purchasing power) of dollars before choosing to open a savings account? No, of course not. Savings represent the portion of one’s accumulated wealth held as liquidity (i.e., money) either for a rainy day, to accumulate before spending or investing it, or just to safeguard this portion of your wealth safely and securely. But an inflating dollar doesn’t achieve these aims. The dollar – and indeed every other national currency – has severe problems that undermine their usefulness. In contrast, protecting wealth is what gold does exceptionally well by preserving the purchasing power of one’s liquidity, not necessarily from day-to-day or week-to-week, but consistently and reliably over longer periods of time.
So instead of focusing on gold’s price when buying it, focus on what gold is, what it offers, and what it accomplishes for you. Gold is a form of savings that securely preserves that portion of your wealth that you choose to hold as sound money.
I recognize that it is difficult to view gold in this way and to give little regard to its price, particularly because we are so used to looking at prices of goods and services in terms of dollars and not gold. Also, we have been trained to think of gold as an investment instead of what it really is – money. But we can overcome these biases and incorrect conventional wisdoms.
One way to do that is to consider accumulating gold on a regularly monthly basis. In other words, save some money every month, but don’t save dollars, the purchasing power of which is being inflated away. Save sound money instead. Save gold.
When gold is viewed in this way, it is clear that even with the four-fold increase in the gold price since 2001, no one has ‘missed the boat’. Building savings by accumulating gold is always a good thing.
Putting the Gold Price in Perspective – follow-up
The above article generated some interesting questions from readers of “Information Line”. Here is one of those questions and my response.
Q. – "I read this with interest, but if I buy gold in 2008 at $1000 per ounce and now it’s 2010 and gold is $500 per ounce, why do I not feel good??? Of course, if you buy gold in 2000 at $280 per ounce and sell in 2008 at $1000 I know you feel good, but life does not always work that way!"
A. – You are looking at gold from the perspective of a trader. In other words, you assume that the only advantage to owning gold is to profit from its price swings. Gold is money, and there are also other important benefits that come from owning physical gold. These include:
- No counterparty risk
– When you own physical bullion, you own a tangible asset. Physical
gold is money not dependent upon anyone’s promise, which is an
attribute becoming increasingly important as the present financial
crisis deepens. Ask anyone who had money in Northern Rock in the UK or
Bear Stearns about their experience when those banks failed. Better
yet, ask anyone who lived through the Great Depression to learn about
the fear that arises when your wealth is reliant upon counterparty risk
in a financial crisis.
- Consistency in commodity purchasing power
– If gold were to drop to $500 in 2010, the price of crude oil, wheat
and other commodities will have also dropped. You would be able to buy
gasoline at $2 per gallon again, and a loaf of bread at much less than
today’s price. There is a close correlation between the price of basic
commodities and gold. So the loss of purchasing power from a drop in
gold’s price may be less than it seems at first glance.
- Not reliant upon government decisions
– The value of the dollar is dependent upon government politicians and
bureaucrats. Therefore, the dollar has become a political tool, rather
than what money is supposed to be, namely, a neutral tool useful in
commerce available to one and all and unfettered by government
interference. Government actions can undermine the usefulness of
currency. Moreover, when you own dollars you are speculating that the
government will not take any actions harmful to the currency. That’s
not a good bet because experience has shown that governments eventually
and inevitably totally destroy the currency under their management.
- Assets outside the banking system – Gold provides diversification by enabling you to place a portion of your money outside of banks, and indeed, the entire monetary system of fiat currencies. Therefore, this portion of your wealth is removed from the threat of capital controls and other government imposed restrictions. This safety you receive from gold can be enhanced further when you store gold in countries outside of where you live and where there is no history of asset confiscation by government.
The above points explain why gold has value. Namely, it is useful in many different ways. But there is one last point worth mentioning.
While the future is unknowable and unpredictable, the probability of gold falling to $500 in 2010 is “slim to none”. The only way for gold to fall to that level would be for the purchasing power of the dollar to be significantly enhanced. In other words, instead of inflating the dollar, the US government would need to embark on a new monetary policy aimed at deflating the dollar, the result of which would be to enhance the dollar’s purchasing power, repeating the experience of the Great Depression. Monetary policy is aimed specifically at avoiding another deflationary Great Depression, so it is reasonable to expect that the dollar will continue to be inflated, meaning the price of gold will continue to rise.
by James Turk
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By Marianne Stigset
July 15 (Bloomberg) -- Gold rose to the highest in almost four months in London as political tension in the Middle East and financial concerns in the U.S. increased investor demand for the metal as a haven.
Gold gained for a fifth day after U.S. financial shares fell to the lowest in a decade yesterday on speculation a shortage of capital will cause some banks to collapse. Iran, OPEC's second- biggest producer, is defying United Nations efforts to halt its nuclear program.
``Heightened tensions towards Iran and fears of a meltdown in U.S. financial markets triggered further flight-to-safety demand,'' James Moore, an analyst at TheBullionDesk.com in London, wrote in a report today. Gold is ``on course to challenge resistance around $982-90 an ounce,'' Moore wrote, without giving a timeframe.
Gold for immediate delivery rose $10.68, or 1.1 percent, to $983.28 an ounce as of 12:46 p.m. in London. It earlier reached $985.16, the highest since March 17. Futures for August delivery rose $11.40, or 1.2 percent, to $985.10 on the Comex division of the New York Mercantile Exchange.
The dollar fell to a record low against the euro, bolstering gold's appeal as a hedge against further declines in the U.S. currency. Crude oil rose above $146 a barrel, increasing demand for gold as a hedge against inflation. Global stock markets fell.
``With the downturn in equity markets a lot of people are diversifying into gold,'' said Mark O'Byrne, managing director of brokerage Gold and Silver Investments Ltd. in Dublin. Gold may reach $1,000 an ounce this week, he said.
Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by gold, advanced to a record 705.9 metric tons on July 10. Holdings in the fund rose from 659.91 tons, according to data posted on the company's Web site July 11.
Morning Fixing
Gold rose to $981.75 an ounce in the morning ``fixing'' in London, used by some mining companies to sell production, from $968.00 at the previous afternoon fixing.
Among other metals for immediate delivery, platinum dropped $3.50, or 0.2 percent, to $2,018.50 an ounce. Palladium rose 50 cents, or 0.1 percent, to $452.25 an ounce and silver gained 31.49 cents, or 1.7 percent, to $19.4049 an ounce.
Platinum fell to $2,015 an ounce in the morning ``fixing'' in London from $2,017 at the previous afternoon fixing. Palladium declined to $450.00 an ounce, from $451.00.
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By John Poirier and Rachelle Younglai
WASHINGTON (Reuters) - U.S. banking regulators swooped in to seize mortgage lender IndyMac Bancorp Inc on Friday after withdrawals by panicked depositors led to the third-largest banking failure in U.S. history.
California-based IndyMac, which specialized in a type of mortgage that often required minimal documents from borrowers, became the fifth U.S. bank to fail this year as a housing bust and credit crunch strain financial institutions.
The federal takeover of IndyMac capped a tumultuous day for U.S. markets that saw stocks slide on a surging oil price and renewed fears about the stability of the top two home financing providers, Fannie Mae and Freddie Mac.
IndyMac will reopen fully on Monday as IndyMac Federal Bank under Federal Deposit Insurance Corp supervision, but tensions ran high as customers at a branch at its Los Angeles-area headquarters read a notice in the window saying it was closed.
At another branch down the road, a man who said he had more than $200,000 (100,000 pounds) in an account -- twice what is normally FDIC guaranteed -- argued with a security guard who was closing up.
The FDIC, which will seek a buyer for IndyMac, estimated the cost of the bank's failure to its $53 billion insurance fund at between $4 billion and $8 billion.
"IndyMac is a company that was pretty much 100 percent invested in mortgage assets, and we're in a bad mortgage market, and it had no capital. It's not complicated," said Adam Compton, co-head of global financial stock research at RCM in San Francisco, which manages about $150 billion.
IndyMac joins top bank failures headed by the 1984 collapse of Continental Illinois National Bank & Trust Co.
The Office of Thrift Supervision (OTS) insisted IndyMac's failure was the second-largest bank failure based on FDIC figures. But the FDIC said its data showed it was third behind the collapse of First RepublicBank Corp in 1988.
RUN ON THE BANK
The OTS, IndyMac's primary regulator, blamed comments by New York Democratic Sen. Charles Schumer for causing a run on deposits at the largest independent publicly traded U.S. mortgage lender.
Schumer responded quickly on Friday, blaming the OTS for not doing its job and allowing IndyMac's loose lending practices. "OTS should start doing its job to prevent future IndyMacs," he said in a statement.
Schumer questioned IndyMac's ability to survive the housing crisis in late June, and over the next 11 business days, depositors withdrew more than $1.3 billion, the OTS said.
"This institution failed today due to a liquidity crisis," OTS Director John Reich said. "Although this institution was already in distress, I am troubled by any interference in the regulatory process."
IndyMac was founded in 1985 by David Loeb and Angelo Mozilo, who also founded Countrywide, another big mortgage lender whose loans helped fuel the housing boom. Countrywide was taken over last week by Bank of America Corp.
FDIC spokesman David Barr said agency officials arrived at IndyMac's headquarters in Pasadena at 3 p.m. (2200 GMT).
The successor FDIC-run bank opens for business on Monday. Over the weekend, depositors will have access to their funds by ATM, other debit card transactions, or by writing checks, but no access via online banking and phone services until Monday.
Yet many customers were in the dark as branches shut on Friday. "I'm pissed. They should have let me know," said Elizabeth Ortega, a 29-year-old hairdresser who has a checking account with IndyMac.
IndyMac had said earlier in the week it was unable to raise new capital, would slash staff by 60 percent and had stopped making home loans. Its stock then tumbled, last trading at 28 cents on the New York Stock Exchange, down 95 percent in 2008.
The FDIC insures up to $100,000 per deposit and up to $250,000 per retirement account at insured banks.
At the time of closing, IndyMac had about $1 billion of potentially uninsured deposits held by about 10,000 depositors. The FDIC said it would pay those depositors an advance dividend equal to 50 percent of the uninsured amount.
The OTS told a conference call with reporters that it did not expect significant market impact from IndyMac's closure as the firm is not a systemic institution and does not have numerous counterparties. Reich also said he did not expect a larger thrift to fail.
MORE FAILURES SEEN
Four small banks have already been closed this year and the FDIC is hiring more staff in preparation for more failures. The agency has boosted its list of troubled banks to 90 and has said an increasing number of banks face high exposure to deteriorating conditions in commercial real estate and construction lending. Last year, just three banks failed.
"IndyMac's takeover by the FDIC is one of many to come," predicted Daniel Alpert, an investment banker at Westwood Capital in New York.
Former FDIC official Ann Graham said it was not unprecedented for the FDIC to start running a bank after it fails. "It happens when they need to move more swiftly with the closing than they can move with a potential sale," said Graham, a law professor at Texas Tech University.
"They don't have to sell the institution over the weekend," she said. "They have the time to shop around."
Graham said the FDIC has the authority to operate an institution for two years but expected the agency would dispose of it much sooner than that.
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