Gold's stabilising role and the week that hopefully was in Europe - Davies

Hinde Capital CEO, Ben Davies, looks at the changing nature of gold's monetary role, the potential outcomes of this week's Eurozone summit and the importance of the internet

GEOFF CANDY:  Welcome to this week's edition of Mineweb.com's Gold Weekly podcast.  I'm here live at the Mines and Money Conference in the Business Design Centre in Islington, London and joining me is Ben Davies.  He's the co-founder and chief executive officer at Hinde Capital, they're a London based financial services provider and they run predominantly a gold fund.  If we look at what's going on macro-economically, there's a lot of chaos in Europe at the moment - a lot of pressure being put on European leaders, particularly for the Summit coming up over the next few days, a lot of concern about whether or not there will actually be a Euro at the end of this or not.  Clearly this has an impact on gold prices.  How much of it is impacting on gold prices or how much of this is priced into gold prices at the moment?

BEN DAVIES:  I think that's a very good question.  Actually people are probably quite disappointed with the way in which gold has been performing and also silver which is a cousin, a poor cousin. It's been trading particularly poorly and possibly that's the industrial component to the silver market, but gold has been part of the risk-on, risk-off trade and as dull as that sounds as an explanation I think that's a reliable explanation.  Clearly the gold price when it hit $1900 it had a mini parabola possibly?  It was playing catch up with the proliferation of currency in the world and it felt a bit over extended and certainly there is a lot of rumour and certainly I subscribe to it that there was some central bank intervention in the market.  We see central bank intervention in many markets - so why won't we see it in the gold market and I certainly think they did that in order to get through some of the co-ordinated actions in foreign exchange and also bail out packages like we are seeing with the EFSF and possibly now a fiscal union as they are trying to bring cessation to the euro problems - which by the way long term I think the euro does have severe difficulties - there will be defaults.  But needless to say that put the lid on the market and that really was a game changer of the central bank intervention because it flushed out a lot of longs in the market.  Since then we've really witnessed credit tightening, a lot of our indicators that we look at, show severe stresses in the system.  There is no inter-bank market.  Liquidity has now been provided by five central banks in a co-ordinated fashion and this has gone some way to buffering the markets but this is not a liquidity issue, this is a solvency issue.  So this is only going to pave over the problems for the time being.  What does that mean for the gold price coming around to your original question, I apologise, is that the market definitely after that central bank intervention exhibited some de-leveraging, that risk-on, risk-off and it was right across the board.  There is no doubt though that some central banks came into the market, a 148 tonnes were bought in the October period, so clearly lower prices brought in proper buying - what I call official sticky money.  This is about rebalancing currency reserves, so that was very healthy for the market and I think we are going through a mini aftershock process where the market is going to acquiesce sideways for a while.  I did say early on in the start of the year people could go and see a speech I did back in I believe it was September how we laid out through something called Benford's Law, it was a bit of fun really but we suggested that we would get to 2 100 by February.  I did try and call for it a bit earlier when we felt that we were pushing up through $1900 but central banks put the kibosh on that so I still think February we are going to see those $2100 - which interestingly will be into the Chinese New Year - which in fact actually comes a bit early. 

GEOFF CANDY:  The risk-on, risk-off trade is an interesting dynamic because there is almost a to-and-fro between that and the notion of safe haven buying.  So sometimes for example we get a sense of gold as a safe haven and at other times it seems to be trading as a risk asset and it seems to go between the two of these.  Has the notion of gold as a safe haven almost not necessarily run its course but now become so much part of the discussion that it's now built into the market?

BEN DAVIES:  The reason why I am invested in the gold market...I think gold is money.  The way I value gold is based on money and when I look at fair currency in the monetary base, to go back to what we believe is a fair value, it is not inappropriate to have a gold price of $4500  - what we're experiencing now is a resetting of gold in the financial system as a monetary asset.  People talk about safe havens because they are trying to reduce liability risk.  Certainly if you want to be Machiavellian, you could say the central bank intervention in order to get co-ordinated action through, they didn't need the gold price shooting through $2000 and then rocketing up to $3000 because that would be very suggestive that the financial system was very unstable.  So certainly I needed to keep the lid on it and the reality of that situation is that yes some people have gone "oh maybe gold isn't as safe as I thought" but those who really understand and as people like myself educate more people who are not so familiar about gold and what it really means within the financial system - that will come to pass.  People will understand the volatility in gold is actually a function of the currencies but when you have got all currencies debasing it's just the to-and-fros between the dollar/euro/Yuan and the gold just gets caught up in that mix.

GEOFF CANDY:   And how do you see gold's role as a monetary asset changing over the next few years?

BEN DAVIES:   Under a FIAT currency system clearly in order to maintain the welfare state you want to be able to pay for services, social security and medical care in the US.  The fiat currency is the perfect system because you can print as much money as you like.  That gets you re-elected so you can argue that the statist approach would be to maintain the FIAT system.  What is pretty clear is that the system isn't working.  Fractional reserve banking isn't working because effectively you make a zero provision weighting by buying sovereign debt and lending it out multiple times on bank balance sheets and we are now realising that these sovereign balance sheets are actually worthless, they are bankrupt.  So the whole financial system is brought into question and it's not inappropriate now that people are looking for an asset that has no liability that can really store savings and be used ultimately as real capital in the system and that is gold.  So perhaps government will be the last thing that they will want to bring back unless we have another Reagan come along who is serious potentially about bringing back the gold standard.  I personally don't want a gold standard because at the end of the day that is still by decree of government.  Fiat means by decree of government and a gold standard really is a fiat standard, it's just a gold standard.  I believe that we should have a free market, free gold, association where supply and demand decided by the free markets will ultimately determine what the price of gold is and the internet is a very powerful tool and people underestimate it.  It's got a huge global consciousness out there which is now beginning to understand what is wrong with the financial system and how gold could actually be a huge stabiliser.  But in order to stabilise it we need to bring gold back too much higher prices to off-set the proliferation of debt credit money that has occurred in the system over these last 40 years of this FIAT currency system.

GEOFF CANDY:  To close off with then, if we look at where we are now, particularly with Europe and coming back almost full circle, how do you see the next few weeks playing out for the Eurozone and what is it likely to do for short term gold prices especially given the volatility we have seen in recent weeks?

BEN DAVIES:  Are we going to look back and go this was the week that was? I am hopeful clearly, Merkel and Sarkozy talking about fiscal integration, fiscal union which you need, you can't have monetary union without fiscal union.  It doesn't work we've seen that but there is a sequencing event here and it's interesting that the ECB president, Draghi - he spoke last Friday and it was a very important speech because he talked about, he inferred sequencing.  If they get a treaty change we move towards fiscal integration then maybe we will implement some form of monetisation.  We will be a backstop in the system.  There was only 5% of MEPs who were actually in the European parliament to listen to that.  They all came back for the gaming act afterwards which no doubt prodded by lobbyists - it's tragic.  But I am hopeful that there is a sequence of events here because Mario Monti, he's a Europhile, he's a technocrat, actually in this case with Berlusconi is out of the equation - there's no coincidence they are now starting to come to some sort of agreement.  I am hopeful that they will come up with the beginnings of fiscal integration but this is only beginning because it is going to take a lot of time for this process to pass.  You need ratifications of the treaty but it could be the start of really preventing the system imploding because that's what we are talking about here.  There is no inter-bank lending - it's having huge ramifications on Asia.  There's a lot of lending out of Europe and the US into Asia and I've just come back from a trip there and the mood has changed.  Not only are they looking at China PMIs toning down obviously the Chinese PBOC has started easing there as part of this whole process but they are worried and that's the first time I've seen that part of the world feel fear.  Even more so in some respects than I saw in 2008 and that has huge ramifications for commodity markets and, in particular, gold and actually in the interim there has been a lot of selling by speculators who bought into a lot of gold ETF funds in China.  So part of the sell off we saw in recent months was actually not because they wanted out of gold but they've lost so much money in housing which they have all bought on margin and with the macro prudential regulations they have just crashed out of that market and also stock markets also being down horrendously in Asia.  So they had to liquidate.

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