Gold News

Two factors influencing September's price

BullionVault's Paul Tustain considers if it's a good time to buy.

Gold is currently about 20% down from its May top. For those who like buying things which are white hot, gold is probably off the radar. But if you prefer buying things colder, and when the fundamentals are stacking up, then now might be the time.

I want to tell you about a long term influence and a short term influence.

First the long term

I'm acutely aware of US house prices right now. Two weeks ago 'The Economist' magazine wrote, "the latest figures showed that in July prices of previously owned homes [in the US] rose at their slowest pace in more than 11 years. In the past 12 months they are still (just) up in nominal terms, but down in real terms".

Still to come is the painful bit when annually reviewed 100% mortgage rates are re-set. Large numbers of borrowers cannot afford the revised repayments, and selling will be tough because unsold housing stock is at record levels.
This is dangerous territory.

It is hard to overstate the impact of US domestic housing values on the world economy. The world's output is propped by the $700 billion USA trade deficit which, it is universally agreed, is unsustainable.

The US demand for all those imported goods is stimulated (i) by re-financing the inflating housing assets, worth about $10,000 per family per year, and (ii) by the policy of deficit financing of the US government, worth about $5,000 per family per year. Together these have been artificially boosting private spending power continuously since 2000. As a result the people and government of the US have used up important spending power, and taken on debt at the wrong end of the economic cycle. Big sovereign and private debts should happen (if at all) at the bottom of the demand cycle, not at the top of it.

Thinking through from this situation presents many potential risks.

  • Reducing demand can mean recession, job losses, lower tax receipts, and even bigger budget deficits.
  • Falling house prices and job cuts can mean default, lender caution, and a credit squeeze.
  • All of this could weaken the US dollar, and encourage foreign bank dollar sales leading to inflation.
  • Inflation and the spectre of financial failure could mean sharply lower stockmarkets.

Now that holding up demand through house price inflation seems to have run its course, the US economy badly needs a new source of consumer buying power. Perhaps there is one out there - though it's not easy to see where it is. But perhaps housing equity was the last reserve of consumer wealth available for duty as a demand stimulant, and now there's nowhere else to turn.

Now the short term influence

The world's major central banks have an agreement which limits the amount of gold in their reserves which they are allowed to sell. It has been widely published that with a good gold market this year they chose to sell less than the limit. The deadline for this year's ration is 26th September, which means that if - with the softer price of recent weeks - these central banks are tempted to use up their ration, there would be a large supply depressing the market until that date. Moreover if the fear of this was out there in the futures market then there would be speculative sales anticipating short term price softness and driving the price down as well.

Those who read me regularly understand that I have the highest respect for the market's ability to make me look an idiot very quickly. Nevertheless, bearing in mind that it takes a few days to set yourself up to buy gold, I thought this was something you might like to know about right now.

Paul Tustain is the founder and chairman of BullionVault.

See the full archive of Paul Tustain articles.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals