Adrian Ash: Gold An Insurance Policy More Than Safe Haven

October 26, 2011

Head of research for BullionVault says the yellow metal suffers from a case of mistaken identity.

 

Adrian Ash is director of research at BullionVault, the London-based online gold and silver exchange that holds more than 26 tons of the yellow metal for its clients. Hard Assets Investor Managing Editor Drew Voros recently caught up with Ash to talk about the current state of gold and the precarious state of the eurozone’s sovereign debt.

Hard Assets Investor: Why is gold shedding its safe-haven status, especially with all this uncertainty going on with European debt problems?

Adrian Ash: Gold is suffering from a case of mistaken identity. Several times in the last 10 years it was mistaken as a risk asset. During the first phase of reflection after the dot-com bubble, you had the U.S. cutting interest rates down to 1 percent, the European Central Bank to 1 percent and the Bank of England went to 2 percent, which at the time were pretty much historic lows for base rates. And gold rose alongside all the way. At the time it looked very much like a kind of happy, pro-growth investment, which very much jars people’s perception of gold being a safe haven.

“Safe haven” is a bit of a red herring as well. Gold isn’t a safe haven; it’s an insurance policy. A safe haven is where you run as you try to get out of the fire. Maybe it’s the fire escape, or maybe you’re jumping out of the window. Anyone who’s piling into Treasurys has to remember that the imminent cause of this state of the crisis now is sovereign insolvency.

Gold is not a safe haven if all you want to do is sit on it forever. That’s why gold continues to attract longer-term flows. People assume that gold will go up automatically when other things go down. And that’s not how it works. It wasn’t true during Lehman Brothers. People assume gold works in a safe haven because that’s a journalist phrase that is often applied to it.

HAI: Gold has been range-bound in the $1,600 area. Is this due to what’s happening in Europe?

Ash: This is a pretty classic pattern actually for the bull market over the last 10 years. Gold ran away with itself over the summer. The rise to $1,920 looked very much like a rise in silver that we saw in the spring. Not quite as dramatic. When gold got to $1,920, it looked like the perfect storm. Now with inevitable pullback, I think the volatility suggest that conviction traders have gone AWOL.

What you haven’t seen, of course, is a large amount of redemptions from the big gold ETFs. In physical bullion, you’ve seen stronger demand on the price drop. Here at BullionVault, we’re now looking after 26 tons of gold bullion for our users. That’s up by about 2 1/2 tons on the year. When gold races ahead of itself, pulls back sharply, shakes out the hot money, a technician would say it’s consolidating. But I’m no technical analyst. All I see here is basically it’s lacking short-term direction.

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