Yo… Don’t Sleep on Gold!

There is no denying that gold has had quite the run for the last decade or so prior to 2013. Any financial technician would agree that the gold chart from 2002 to late 2011 was a thing of beauty. It looked less like an asset and more like a Katsushika Hokusai painting of Mt. Fuji.

Since 2011, though, things have not been as pretty. The alternative to central bank currency has had less of a run, and something more closely akin to a humble retreat. These days the gold price seems to be stuck in a channel between a support of a high US$1,100 an ounce to a resistance of around US$1,300 an ounce.

So are these downward pressures in the market and from the mainstream media signals to sell?

One could make a solid argument that, because of the recent strong dollar, cheap oil, near (potential?) eventuality of global rate hikes, deleveraging, risks of deflation, and certain positive (arguable) economic indicators in the United States and emerging economies, now is a good time to sell. Or at very least to cut some out.

And just like anything else in the economics sphere, you might be right. Or very, very wrong.

If one were to ignore what central banks and governments around the world are doing—and not just saying—then they could be ignoring the proverbial canary in the coal mine.

Bullion Star reported last year that the Chinese government was introducing policy to help develop its gold market. In a detailed, translated Chinese government policy memo it discussed the importance of a healthy gold market and detailed how to develop and maintain it.

Although gold purchases significantly decreased in China last year, the last 10 years has seen Chinese buyers accumulate over 10,000 tons of gold. Moreover, unlike in the United States, the Chinese government is actually encouraging gold speculation and investment. It’s also on the path to wrestle the global gold market right out of London’s hands in the near future.

In addition to encouraging its citizens to own gold, the Chinese government admits that gold plays an important role for central banks by providing an anchor for economic security. In other words, they are saying that gold is and always will be the de facto standard of monetary policy. This flies directly in the face of current global central banking policy. It also ensures that gold isn’t going to lose its luster anytime soon (at least as far as Asia is concerned).

Russia and Western powers (the United States & EU) have been engaged in a financial war for some time now. The West has implemented sanctions to try and cripple Russia because of its position in the Ukraine debacle. Russia has retaliated by decreasing its U.S. treasury bonds and increasing its gold holdings.

A strong point to remember here, gold is the antithesis to central banking and fiat money. If you buy gold and don’t use it for your teeth, jewelry, or electronics, then it’s a good bet you probably don’t have a lot of trust in governments or their central banks. Vladimir Putin isn’t seen wearing a lot of jewelry, his teeth seem normal, and I can’t recall ever seeing a Russian smartphone at the electronics store, so one has to assume that Putin isn’t crazy about Western central banking or its policies.

Last but not least, the world’s second largest user of gold, India, saw shipments swell to roughly 940 metric tons from April through January of this year. The jump was due to restrictions being curbed in May of last year. The Indian government allowed more agencies to bring in gold and abandoned a rule requiring shippers to re-export 20% of their shipments. It’s no secret that Indians love gold, and as their wealth and prosperity increases so too will their gold holdings.

Obviously, the point trying to be made here is why sell if others—especially central banks—are continuing to buy? Moreover, governments aren’t just buying… they’re trying to repatriate what they already own. Clearly, gold is not the relic that CNBC and others would have you believe.

The main counterargument to buying or holding gold is the inflation/deflation theory. It’s true that there hasn’t been any significant signs of inflation (accept for some items at the grocery store or maybe a college education), but clearly there are signs of deflation (especially in wages). The common theory is that gold is an inflationary hedge, but the uncommon theory is that it is actually used as a hedge in deflationary times as well.

In other words, and again back to the essence of this article, gold offers protection against central banking stupidity—and there’s been plenty of this going around. Or as Marc Faber puts it, shorting a central bank is the “trade of the century,” and the only way to short them is to hold gold.

Another interesting consideration is the gold miners. Gold mining stock prices have been trading at discounts for quite some time. It’s been choppy waters for a lot of the big miners, and no clear indication whether a sea change was on the horizon. Moreover, even at discounted prices, very few junior miners were being snapped up by the larger players, which left a lot of uncertainty in and around the industry.

This appears to be changing. In an interview with The Mining Report, Jeb Handwerger of Gold Stock Trades sees a surge in mergers and acquisitions (M&As) and believes this demonstrates that the big miners see price stability and future growth potential in the market.

As with any industry, M&As are clearly a bullish signal. It’s well-known in most cases that management will not seek out expensive acquisitions if they are not confident about future growth. Moreover, boards would never agree unless there was some sort of shareholder value involved, especially in such rough-and-tumble market conditions.

All things considered, and a quick look here at various asset bubbles inflating and deflating around the financial world, makes gold ever more appealing in 2015.

Whether you’re buying or you’re selling, the message seems clear… don’t sleep on gold this year.