What Does the Recent Saudi Gold Rush Mean?

by: Peter Cooper November 16, 2008 | about stocks: GLD    

Peter Cooper

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The revelation on this blog, actually sourced from what appears to be a reliable story in the Gulf News, the leading regional newspaper, that Saudi Arabia has spent a total of $3.5 billion on gold over the past two weeks has naturally attracted huge worldwide interest.

I cannot verify the source but all I can say is that this has the hallmarks of a genuine story, based on my 25 years in financial journalism. First, it was buried on an inside page and the amount was given in UAE currency later in the story - hardly the action of somebody looking to manipulate the gold price, more an indication that the sub-editors did not understand the importance of this story.

Second, this is how the best stories emerge from Saudi Arabia - the market is not very transparent but insiders do notice big changes and pass this information on, and it surfaces as well sourced rumor. I am afraid this is about as good as it gets in the Middle East.

Truth in rumors?

After 9/11, we had rumors about chartered 747s flying full of gold and dollars back to the Kingdom to avoid the increased scrutiny of US regulators. Was it true? Real estate here is said to have boomed on the back of this new money - that certainly happened, did the transfer? We do not know for sure.

So what is going on? By whom and why are these gold purchased being made? Again we can only indulge in informed speculation - nobody is ever going to give an on the record comment on this.

However, we do know that the Saudi stock market has crashed over the past two weeks. There has been an enormous amount of money cashed out. The obvious source of the money for gold purchases has to be that money.

The problem for Saudis is that by cashing out of local stocks they get their own riyals in exchange, and riyals are effectively US dollars due to the currency fixed link. The US dollar is presently high, so diversifying into another asset class makes sense.

But what do you buy? What is safe these days? Dubai villas, perhaps but the rest of regional real estate is crashing? US stocks - you must be joking?

Conspiracy nonsense

I think some of the conspiracy theorists are wide of the mark. People love to come up with elaborate rationales for actions. It is laughable to see Saudi Arabians rushing to buy gold as a conspiracy to bring down the West. The West has brought that on itself, and the Saudis are just trying to find an effective shelter for their wealth from that collapse.

Gold and silver are precious metals with a limited supply that retain their value over time. Also if we are in a repeat of the late 1970s, as this author believes, then cash and gold are the safe havens, with silver probably the best of all, if very volatile.

Therefore, my lesson to draw from the Saudi gold rush is that very much higher gold prices are coming and investors in the Kingdom are making a logical choice ahead of the global pack. If you can not beat them I would join them and preserve your capital.

Incidentally, what I would like to know is who is buying? The report in Gulf News makes it sound like the broad mass of local investors, not the government, and that would explain why such a report has surfaced. If it was the government we would not have heard about it.

So this is just a local flight to a safe haven asset class by people panicking about plunging local and global stocks. But $3.5 billion in two weeks is a big shift in demand for gold in a short period.

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This article has 17 comments:

  •  
    Nov 16 08:06 AM
    Given all the pronouncements from the G-members about the need for stimulus (read: printing and deficits), the obvious epic deflationary pressures, and the obviously in-the-works epic inflationary response by central banks and sovereign governments, it only makes sense for those who can to move assets into gold...and then not really tell anyone. This is the nature of goldbugs everywhere. Buy it, and then keep your mouth shut. Gold offers something of value not offered by any other asset class: privacy.
    Reply | Link to Comment
  •  
    Nov 16 08:14 AM
    Also, Iran is doing the same

    www.guardian.co.uk/bus...

    Disclosure: Silver, gold, silver and PGM mines
    Reply | Link to Comment
  •  
    Nov 16 08:57 AM
    Apparently,China is doing the same
    Reply | Link to Comment
  •  
    Nov 16 09:14 AM
    The old saw "those who own the gold makes the rules" figures quite prominently, imho. Btw, when gold is compared to other currencies, its performance is nothing short of fantastic!
    Reply | Link to Comment
  •  
    Nov 16 09:32 AM
    Thank you Mr. Cooper for a terrific article! Could you please elaborate on your comment "with silver best of all" as I believe that silver will far outdistance gold once the tsunami begins.
    Reply | Link to Comment
  •  
    Nov 16 10:10 AM
    I dont think it takes a conspiracy theorist to consider that the Arabs are thinking about a gold back currency.

    Thats actually kind of old news.

    If I was the Arabs, and saw a potential for a USD devaluation, which doesnt take a conspiracy theorist to realize is possible right now...my next thought would be to how I could protect myself from such an event.

    A gold backed regional Arab currency would fit the bill quite well.

    Make the world pay for oil in Dinars (gold backed) would effectively make the world pay for oil in gold.

    Now that would be smart business, imo.
    Reply | Link to Comment
  •  
    Nov 16 11:22 AM
    In January, 2003 Jim Sinclair wrote a prophetic article about Federal Reserve Gold Certificate Ratio (FRGCR), a.k.a the "Gold Cover Clause," that foretold what is the crisis we have now, with his analysis at the time of using FRGCRs, all of which he now suggests may finally be under consideration during the G20 meeting this weekend, therefore worthy of your review:

    www.gold-eagle.com/edi... with a follow up article, www.gold-eagle.com/edi....

    Jim's MineSet website, www.jsmineset.com/, has the updated article, "The Mother Of All Crises: Gold Moves Back Into The Monetary System" regarding today's possible use of the FRGCR.

    This would be a G20 agreement linking the M3 dollars to a gold value ratio of M3 to U.S. Treasury gold ... a brand new ballgame with a new set of implications. This could be the underlying reason for the Saudis, Iran and China buying gold, and for others recently reducing short positions in gold.
    Reply | Link to Comment
  •  
    Nov 16 11:48 AM
    Lord I get tired of the goldbugs. Jim Sinclair, Gary North and the likes were touting gold back in 70s when it hit $800 and then crashed, and stayed crashed for years. People in post above say gold has been a great investment-it hasnt unless you cherry pick your time frame. It has been in the doldrums a hell of a lot longer than it has been "a good investment".
    Reply | Link to Comment
  •  
    Nov 16 03:44 PM
    Ditto for the DOW, S&P, Russell, Nasdaq, etc. Cherry picking is involved in all of them.

    Lord I get tired of the stock market bulls, no matter how early or late in the cycle, its the same Mantra: Buy, Buy, Buy.

    At least Gold remains and retains some value against the total destruction of wealth for those holding Enron, Lehman, AIG, BS, WAMU, Fannie, Fredie, whatever.

    Take CBS, multi decade lows, Gold never went below 25% of its peak, CBS certainly has. I'll take 30% any day versus Zero. $800 gold vs a low of $250.

    30% has a chance to make a comeback, 0% is what many are holding.

    What does it mean, Saudis bought $3.5 Billion in gold? Hmmmm, they hold $2.5 Trillion in US debt, absolutely nothing. The Chinese have been buying gold for years, same with India, Russia, Vietnam, anyone with distrust of any currency. With everyone buying, who is selling? The Central Banks of the West and the IMF.

    If there was a big desire for physical gold, it would be much higher. The media has gotten around to Gold because of all the Inflation/deflation hype. IMHO
    Reply | Link to Comment
  •  
    Nov 16 04:01 PM
    And so it goes.... To those who are piecing the puzzle together -and it appears that there will be few of us that make it out of this mess alive.. Thank God we don't pay attention to the enless stream of BS that we hear.

    Remember that you were warned long and often to buy gold and silver and to buy on dips...and if you haven't, you have only yourselves to blame.. When you only watch FOX news, or only follow CNN you will most suredly be taken to the cleaners. Start reading news from around the world, and pay attention to what is happening on the streets. If you have access to the internet, and you do, you have no excuses.

    By the way, Google "tent cities" and check out the videos of cities nearby. It will shock you.
    Reply | Link to Comment
  •  
    Nov 16 05:56 PM
    no it won't.

    just a lousy 40 years ago, people were afraid to ride in Chicago buses for fear of getting shot.

    You must have led a sheltered life. I worked on an assembly line in Cicero in 1966, a couple of black friends of mine used to tell me what areas to stayout of over the weekends. In those days, there were parties called "zebra" parties, blacks and whites at the same party. You had to have a pass to get in and out of the area.

    Tent cities? At least they probably have a better handle on the rats, cockroaches and other vermin that the slums contained.

    Been there, seen that, done that. Then as now, wandering in certain areas meant "who" you knew.

    Damn, I wish I could remember who headed the Blackstone Rangers.
    Reply | Link to Comment
  •  
    Nov 16 08:59 PM
    If you are so tired of listening to Jim Sinclair and think he is such a mis-imformed novice, or chartist, then why don't you take him up on the standing $1,000,000.00 bet he has open to anyone who cares to put their gold where their mouth is, that gold will reach $1650.00 an ounce by January 2011? After reading your remarks, I'd think that would be some easy money, after all, isn't that what you're in the market for?
    Reply | Link to Comment
  •  
    Nov 16 09:46 PM
    yes. except that US will not wat that to happen and Saudi Arabia will not want to affend US due to the Iranian threat......IMHO


    On Nov 16 10:10 AM www.rapidtrends.com/bl.../ wrote:

    > I dont think it takes a conspiracy theorist to consider that the
    > Arabs are thinking about a gold back currency.
    >
    > Thats actually kind of old news.
    >
    > If I was the Arabs, and saw a potential for a USD devaluation, which
    > doesnt take a conspiracy theorist to realize is possible right now...my
    > next thought would be to how I could protect myself from such an
    > event.
    >
    > A gold backed regional Arab currency would fit the bill quite well.
    >
    >
    > Make the world pay for oil in Dinars (gold backed) would effectively
    > make the world pay for oil in gold.
    >
    > Now that would be smart business, imo.
    Reply | Link to Comment
  •  
    Nov 16 11:07 PM
    If the company is still in business, eGold.com housed its gold in the UAE.
    Reply | Link to Comment
  •  
    Nov 17 01:25 AM
    Canada offers a Gold/silver Despository trading in the US under the symbol CEF, you even get a dividend.
    Reply | Link to Comment
  •  
    Nov 17 01:09 PM
    The mind reels at what would have happened to the silver market had the Saudis deployed all (or even part of) the $3.5B into physical silver.

    At $10/oz, they would have been able to pick up 350M oz., more than twice the amount in the COMEX warehouse (in theory).

    A question I'm wondering about (and I don't know the answer), is why - knowing that the silver market is so tiny compared to the gold market - someone doesn't take a stab at being Hunt 2.0?
    Reply | Link to Comment
  •  
    Nov 17 01:53 PM
    why not a hunt brothers 2.0? maybe because this is bs, too! i mean, don't believe your own government but believe what someone says about "what the Saudi's are doing?"!!! Come on, people--WAKE UP! How many infantry divisions will the Saudi's get for all that gold? Any? Obviously not. Sorry, but no home security=no financial one either. Maybe all this is about "protecting the Saudi's and their oil wealth," CERTAINLY THE BRITISH THINK SO!, but that's assuming that governments don't act in their national interest, a dangerious assumption here. Does the US even get any of its oil from Saudi Arabia? They've killed thousands of our citizens WITH INTENT! Are we truly protecting them? Follow your own government's money--YOUR MONEY as some have called it--and you yourself may be well rewarded.
    Reply | Link to Comment
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