Beginning in the Summer of 1999, every two months, Britain auctioned off 25 tonnes (804,400
troy ounces) of its long-held gold reserve at prices below $300 an ounce (remember gold
peaked at $800 an ounce in 1980). Its stated goal was to gradually replace 415 tonnes of gold
with more fashionable monetary reserves, such as euros, yen, and dollars. The gold price went
to a recent high of $ 1900 (up 7.5 times since the lows in 2001). Call it the Estate Sale of the
British Empire!
2004 saw the creation of Gold ETFs (exchange traded funds – perhaps the subject of a future
short note) which are sold as a “safe” way to hold physical gold at low cost and aimed at the
mass market. (The latest, high profile, rogue trader saga, which cost UBS $2.3 billion and CEO
Oswald Grubel his job, was orchestrated through their ETFs). In the East, gold coins can now
be purchased from special purpose ATMs (I get nervous when regulators make it easy for
retail investors). Worldwide, bank vaults are full and at premium rentals as they fill with coins.
Co-incidental with the introduction of gold ETFs, the fundamentals of gold changed. Gold
mining shares no longer track the bullion price. Gold mining shares have done very little over
the same period from 2001 – Goldfields is up from R65 to R120. Many suggest that, therefore,
gold mining stocks are cheap. We believe this may be further proof that bullion is expensive.
The very clever people who bought from the British government in 2000 will possibly get a
good opportunity to sell on the back of the Greek debt default as fiat (paper) currencies and
the survival of the Euro are called into question.
We tend not to hold gold bullion as it is expensive to buy (the commission is 10% plus), it pays
no income and the only other reason to hold, would be in the speculation that prices will
continue to rise. Having risen by so much already, we think we are in the late phases of a
bubble and will watch with interest, but probably won’t get involved.
If you hold gold, you may want to watch this space with particular interest and attention.