EDITOR: | July 20th, 2016

Gold – the strategic investment metal

| July 20, 2016 | No Comments
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A funny thing happened after Great Britain voted to leave the European Union on June 23. According to Reuters, the British people quickly rediscovered their need for some gold reassurance.

From ReutersAfter Brexit, ordinary Britons warm to gold as a safe haven

Dealers are seeing an unprecedented amount of interest in gold, much of it from first-time buyers, to take advantage of its role as a safe haven in times of stress or unexpected “black swan” events like Brexit.

“The speed at which people are purchasing gold is unprecedented,” said Joshua Saul, CEO of The Pure Gold Company.

After decades of being told by bankers, politicians and the media to ignore gold as an investment, British investors and savers suddenly found they liked having the peace of mind that came with owning some physical gold again. Part of that was probably due to the “Remain” campaign peddling scare, doom and disaster if Britons voted to leave. In reality, Sterling and the stock market fell at first, with the stock market quickly stabilising. Then normality returned as very little of the scare campaign turned out to be true – or, at least, not on the scale and immediacy predicted.

But apparently that hasn’t stopped Great Britain’s renewed interest in owning some physical gold. According to the government-owned Royal Mint, it saw a seven-fold increase in sales of 100-gram bars (around half the size of a credit card and costing around $4,400) in the two weeks following the June 23 vote.

Since then:

“Around 4 million pounds ($5.5 million) of gold and silver were traded online on the platform of London-based Bullionvault.com on the June 25-26 weekend, seven times the average weekend of the previous 12 months.

The number of first-time UK buyers on the site rose by around 170 per cent in June and the first week of July, compared to the previous 12-month daily average, it said.”

But gold as a strategic asset isn’t just needed in Great Britain. In the Eurozone, Italy’s insolvent banks are still waiting for a rescue, and still sitting on 360 billion euro of non-performing loans (close to 20% of all Italian bank loans and about 20% of Italy’s sluggish GDP). On Tuesday July 19, the European Union’s highest court issued a judgement requiring bank bail-ins before any state taxpayer bank bailouts. Italian bank bondholders and large depositors must take deposit write-downs and bond haircuts before Italy, or any Eurozone state, can inject state funding. Italy’s banking crisis is in reality a Eurozone crisis, since Italy cannot handle it alone.

Thursday’s court decision just moved the Italian banking crisis into third place in the EU behind the EU terrorism crisis and Brexit. But the risk of EU contagion is very high: French banks alone hold over 250 billion euros of Italy’s debt. Since the start of July, Italy’s press has been full of reports of bank runs as depositors empty the ATMs of all cash and are winding down their bank deposits.

But that wasn’t the only recent court decision with strategic implications for gold investors. On Tuesday July 12, China suffered a crushing loss to the Philippines in the Permanent Court of Arbitration in the Hague over China’s claim to a massive exclusive economic zone in the South China Sea. China said that it will ignore the court and that it has no jurisdiction.

The problem for China with that, is that the Permanent Court of Arbitration is the world’s oldest institution for settling international disputes, established at the first Hague Peace Conference in 1899. Even worse, the Philippines brought an arbitration case in 2013 against China under the U.N. Convention on the Law of the Sea, the governing part of international law ratified by both countries. Unfortunately for China, the convention specifically allows for a tribunal to make legally binding decisions even if one party is absent.

China claims almost all of the South China Sea, a sea that stretches about 1,200 miles from the Chinese mainland. The sea covers a massive 1.4 million square miles and reaches eight countries with a combined population of about two billion. The sea itself handles about half of the world’s daily merchant shipping, a third of global oil shipping, two-thirds of all liquid natural gas shipments and more than a tenth of the Earth’s fish catch.

In other words, a troubling standoff with China looms even as the global economy is slowing, elections looming in the U.S, France and Germany, and a constitutional reform referendum is coming in Italy in the autumn.

Given all the uncertainty, there has probably never been a more apt time for investors and bank depositors to own some fully paid up, long term, strategic physical gold. For those that invest in stocks and shares, this summer gold and silver mining are more than worth a look. And I haven’t even started on what’s happening in Turkey!


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