Gold, after generally tracking oil prices in a downward trajectory since early this summer, is now up some 10% since its bottom at the October 6th 2nd London fixing price of $560.75. The link between oil and gold prices, which sound-bite commentators had recently enshrined as some sort of universal formula, now appears much more tenuous and temporary in nature.

Platinum, which had touched on a six-month low only two weeks ago ($1050 on October 24th) traded over $1213 an ounce on Friday November 4th, completing a 15% price rise in only nine trading days. On Thursday, platinum prices jumped 5.2%, the largest one-day gain in the noble grey metal’s market since October 3, 2001.

A general perception prevails that speculative traders, including large hedge funds, have now shifted their attention away from the oil and precious and base metals markets which treated them so well in the first half of 2006, and have now found riper opportunities in the rising markets in agricultural commodities.

Corn, for instance, is flirting with ten-year price records, and traded in the $3.40/bushel range toward the end of this week. Likewise frozen concentrated orange juice for January delivery, at just shy of $2/pound, is now only pennies away from a 30-year record of $2.08. Wheat and soybeans are also rising, as the agricultural complex becomes the trade-du-jour (slogan: We all have to eat!) currently drawing the attention of mobile money.

Yes, gold is no longer the fast-money investment darling that it was on May 12th of this year, when prices touched $725 to complete a ten-month surge of over $300. But, as always, gold is a vital part of any balanced portfolio.

Consider precious metals ETFs. Just the news of the formation of a platinum ETF caused platinum markets to skyrocket over the past few days. Why, exactly? Because ETFs enable individuals, pension funds, hedge funds, and financial institutions to hold precious metals without actually physical custody of the stuff. This opens a whole world of new demand, as seen in the track record of gold ETFs over the past couple of years.

In two years, gold ETFs have so far taken off the market and put into segregated bonded storage some 500 tonnes of gold bullion. At an off-take rate of 250 tonnes per year, that is almost exactly 10% of all the gold mined annually in the world. The gold ETFs, chiefly the US-based GLD, have not only met investor demand, but have to a great extent created new demand.


As John Hathaway of the Tocqueville Funds writes,’


“While price action in futures contracts makes all the media noise, a clearer picture of investment interest in gold emerges in the details behind the ETF…The ETF has become the bridge between the capital markets, central banks, and the souks. It has emerged as an omnibus financial vehicle for obtaining protection, reflecting uncertainty, and hedging bets.”

“… The core group of GLD investors appears risk averse and focused on the underlying metal’s insurance value, not the pyrotechnics of day to day price action. The demand for gold based on risk protection seems potentially far larger and deeper than speculative demand as expressed by gold mining shares or commodity futures.” “During shakeouts in the gold market, the gold ETF has demonstrated stability that is not apparent in other gold investment vehicles. Much, and probably most, of ETF gold is in very strong hands such as pension funds, endowments and individuals who are thinking in generational terms. Despite the 20% decline in the gold price since its 2006 high in early May, holdings of the gold ETF have increased from 11.5 mm ounces to 12.4 mm oz. at the end of September. In contrast, the net long position represented by futures contracts declined 36% in the third quarter.”

Hathaway, who runs a gold fund for Tocqueville, has always talked a sensible game about gold, even back in gold’s Dark Ages (say 2001) when prices had sunk to the $260 area and no one seemed to care about the shiny yellow metal anymore. Today, he sees the gold ETFs as enabling individuals and institutions to hold gold, not just trade futures, but actually possess gold over a long-term, generational timeframe.

With prices hovering around $600 today, gold is by no means overpriced. As investment fads come and go, and currency creation and obligations continue to grow unabated, the limited supply and universal appeal of gold ‘by acclamation of history’ stand as concrete facts of life, to be ignored at one’s financial peril.

When should you buy gold? Simply when you have assets to protect over time, and you find yourself in a world in which all currency yardsticks are defined by government fiat.

In such a situation, question number 1 is, what exactly is money? And question number 2 is, do you have any?