GOLD ANALYSIS

Risk, complacency, perception and gold – Grant Williams

In one of the best presentations we have heard at a mining investment conference, Grant Williams set out his views on the global economy, perception management, risk and why gold remains the ultimate safe haven.

Author: Lawrence Williams
Posted: Tuesday , 19 Mar 2013

Hong Kong -

Sometimes, if one is lucky, one comes across a single presentation at a conference that makes the whole thing worthwhile on its own, and any delegate who didn’t get in to Grant Williams’ (no relation unfortunately) talk at Mines & Money Hong Kong will have really missed an analysis of the current economic situation that was brilliantly put together – and scary as hell. Forget Friedland – often put forward as the speaker people want to hear. His material is largely promotional nowadays. Williams, though, gets right to the nub of how fragile the current economic situation is, particularly for the saver, and how dangerous the current policies being followed by the global financial elite are for the financial well being of all of us currently and in the years ahead.

Williams concentrated on financial risk – and the perception in the markets that we are coming out of the latest stormy period, as put forward by the politicians, and that all is beginning to come right as future risk has been heavily reduced. According to Williams this perception is far, far away from the truth of what is happening out there. Now maybe this could be considered scaremongering and that things will not pan out the way he thinks they will, but if he is correct it paints a picture that everyone worried about their savings and financial future should be aware of.

Williams is portfolio manager at Singapore-based Vulpes Investment management and also puts together the must read ‘Things that make you go hmm’ newsletter which puts forward his own views – and also draws on news and comment from a number of other sources as well. It is always a fascinating read and brings one back down to earth from some of the heady optimism generated by rising stock markets and a flat to falling gold price – both things which Williams believes cannot go on under the current financial scenario.

The talk was titled – Risk: It’s not just a board game – and started off by pointing out that so-called risk free assets like T Bonds have been totally corrupted as such by Central Bank policies. While as recently as 5-6 years ago these were still providing real returns for savers, nowadays interest rates on these are all negative. He gave the example of someone who had saved for their retirement and amassed a nest-egg of $10 million. Back in 2007 this could have been invested in a risk free asset to earn around $480,000 a year – a comfortable amount to live on. Nowadays the real return on such an investment would be effectively $24,000 a year – well below the breadline and a massive reduction in so-called ‘safe’ income.

What is worrying, as he sees it, is the massive complacency in the markets as people just do not understand what is happening financially, or just choose to turn a blind eye and assume everything will work out fine in the end.

He sees the risk as being greatest in Europe which, according to the politicians, has ‘been turning the corner’ for the past three years, but still seems to lurch from crisis to crisis with manufacturing output, particularly in the Mediterranean countries, falling and unemployment, particularly among the under 25s, reaching horrendous levels with around 50% out of work in some countries – an horrendous statistic. And the potential of what could happen in the larger nations has been set by the latest crisis affecting Cyprus which should be ringing alarm bells right across the Eurozone, with many of the EU nations on the edge of financial disaster.

Most of the political and fiscal efforts have been aimed at trying to maintain confidence in the markets, with either surreptitious, or blatant, Quantitative Easing being the magic formula to keep markets rising. But this can become a vicious cycle which commences with Fear =, moves on with QE whereby bonds are bought, yields fall keeping interest rates down, theoretically rebuilding confidence. But as the confidence rebuilds, bonds are sold and yields and interest rates rise bringing one back to the start of the cycle again.

In Williams’ view gold remains the only safe haven investment having been seen as thus for thousands of years and being the one antidote to the eventual disintegration of fiat currencies.

He also spent a significant section of his talk looking at Fractional Reserve Banking, and its inherent dangers and the parallels with Fractional Reserve Gold, where the latest moves by some Central Banks to repatriate their gold held in foreign vaults threatens to expose the proportion of supposedly tightly held gold reserves which have been leased out to the bullion banks, and then sold on many times over.

Chavez’s Venezuela was the first to take this route, but the amounts involved were small and Chavez himself not taken seriously by the global powers that be, but there is gradual agitation for other countries to follow suit. In some cases the amounts involved are small but the recent German move to repatriate 350 tonnes has really begun to raise the ante here. If the Central Banks have leased out perhaps 30% of their gold (as Austria has admitted it has done) which is profitable for the Central Banks – and even more so for the bullion banks which have bought it from the central banks and perhaps sold it out many times over under the Fractional system which pertains – it is then almost impossible for the bullion banks to return this sold-on gold back to the Central Bank which may need it to fulfil its own obligations. It only needs a spate of countries to demand repatriation of gold to really upset the apple cart here – and is also highlighted by the fact that it appears to be taking Germany 7 years to get its 350 tonnes home. Why? It puts the Central Banks potentially in a very precarious position and also is part of the reason it suits governments to keep the gold price under control.

But the latest situation in Cyprus, where the move is to confiscate (steal?) savers’ holdings is perhaps a step too far and could be a calamitous mistake by the Eurozone and stimulate a climate of fear among savers in other Eurozone nations – particularly those on the financial edge of which there are several. Does Cyprus set a precedent?

Which brings us full circle back to gold. The risk to cash savings and to stock holdings, is very real so Williams’ advice is to at least hold some gold.

He concluded by saying that it has never been easier to understand what is going to happen – but knowing when it is going to happen is the problem. As he sees it, it is all ultimately a question of mathematics – but timing on these things is key and when drawn on trying to put a date on the scenario by the conference moderator Williams declined. In his view fiat currencies will collapse and gold will have its day again – but exactly when is impossible to forecast.