PSE Divergence Confirmed — The September Breakout That Redefined Philippine Mining in the Age of Fiat Disorder

 

The choice of the good to be employed as a medium of exchange and as money is never indifferent. It determines the course of the cash-induced changes in purchasing power. The question is only who should make the choice: the people buying and selling on the market, or the government? It was the market that, in a selective process going on for ages, finally assigned to the precious metals gold and silver the character of money. For two hundred years the governments have interfered with the market’s choice of the money medium. Even the most bigoted étatists do not venture to assert that this interference has proved beneficial—Ludwig von Mises 

In this issue 

PSE Divergence Confirmed — The September Breakout That Redefined Philippine Mining in the Age of Fiat Disorder

I. April 2023: The Thesis That Time Has Now Validated

II. September’s Seismic Shift: Mining Index Outpaces the PSEi

III. The Fiat Fracture: Gold's Three-Legged Bull Market and the Chronicle of Monetary Rupture

IV. Gold as Signal of Systemic Stress

V. Fracture Points: Tumultuous Geopolitics and the New War Economy

VI. A Militarized Global Economy and The Fiscal–Military Feedback Loop

VII. Economic Warfare: Tariffs, Fragmentation, and Supply Chain Bifurcation

VIII. World Central Banks Signal Distrust: The Gold Accumulation Surge and Fiat Erosion

IX. The Paradox of Philippine Mining Reform: Bureaucratic Control over Market Forces

X. The Philippine Mining Index Breakout: Gold Leads, Nickel Surprises, Copper Lags and the Speculative Spillover

XI. Conclusion: The Uneasy Return of Hard Assets in a Soft-Money World 

PSE Divergence Confirmed — The September Breakout That Redefined Philippine Mining in the Age of Fiat Disorder 

Beyond the PSEi: Tracking the Philippine Mining Index's decoupling, the gold-fiat fracture, and the systemic risks that power resource equities. 

I. April 2023: The Thesis That Time Has Now Validated

Figure 1 

Back in April 2023, we predicted that rising gold prices would boost the Philippine mining index for several reasons: (see reference) 

1. Unpopular – It is the most unpopular and possibly the "least owned" sector—even "the institutional punters have likely ignored the industry." As proof, it had the "smallest share of the monthly trading volume since 2013." 

2. Lack of Correlation – "its lack of correlation with the PSEi 30 should make it a worthy diversifier" 

3. Potential Divergence – We wrote that "the current climate of overindebtedness and rising rates seen with most mainstream issues, the market may likely have second thoughts about this disfavored sector. Soon." 

4. Formative Bubble – We posed that "If the advent of the era of fragmentation or the age of inflation materializes, could the consensus eventually be chasing a new bubble?" 

Well, media coverage hardly noticed it, but the relative performance of the Mining sector vis-à-vis the PSEi 30—or the Mining/PSEi ratio—made significant headway last September. It critically untethered from its 5-year consolidation phase. (Figure 1, topmost chart) 

Recall: mines suffered a brutal 9-year bear market from 2012 to 2020. The Mining/PSEi ratio hit its secular low during the pandemic recession, pirouetted to the upside, peaked in September 2022, but remained rangebound—nickel lagged, and gold lacked sufficient momentum to lift the index. 

II. September’s Seismic Shift: Mining Index Outpaces the PSEi 

That dramatically changed in September. The Mining/PSEi ratio experienced a seismic breakout, powered by a decisive thrust in gold mines, buoyed further by surging nickel mines. 

But this time may be different. The 2002–2012 bull cycle was driven by Mines outrunning a similarly bristling PSEi 30. Today, the Mines are diverging—operating antithetically from the broader index—a potential reflection of gradual and reticent transition of market leadership. (Figure 1, middle graph) 

The September numbers underscore the shift (Figure 1, lowest table) 

PSEi 30: –3.28% MoM, –18.14% YoY, –6.46% QoQ, –8.81% YTD

Mining Index: +25.86% MoM, +47.97% YoY, +35.07% QoQ, +63.96% YTD 

So yes, it fulfilled our projections of a bull market in motion while validating our ‘diversifier’ thesis. Still, despite its massive run, the sector remains disfavored—its share of the monthly main board volume remains the smallest.

Figure 2

Even with the gaming sector’s bubble showing cracks, speculative interest in PLUS and BLOOM (at 4.38%) nearly matched the ten-issue Mining Index (4.46%) in September. In short, market sentiment still favors gaming over mining. (Figure 2, topmost image) 

Ultimately, the mining sector’s performance—and its transition to a potential secular bull market—will hinge on its underlying commodities. 

In 2016, we wrote, 

Divergence or rotation can only be affirmed when gold mining stocks will move independently from the mainstream stocks. The best evidence will emerge when both will move in opposite directions. This had been the case from 2012 through 2015 when miners collapsed while the bubble industries blossomed. It should be a curiosity to see when both trade places. Time will tell. [italics original] (Prudent Investor, 2016) 

That’s a bullseye!

III. The Fiat Fracture: Gold's Three-Legged Bull Market and the Chronicle of Monetary Rupture 

Gold’s long-term ascent is a chronicle of monetary rupture. (Figure 2, middle chart) 

The first major break came under Franklin D. Roosevelt, with Executive Order 6102 (1933) and the Gold Reserve Act (1934), which outlawed private gold ownership and revalued the dollar’s gold peg from $20.67 to $35 per ounce. This statutory debasement set the modern precedent for political interference in money. 

The second rupture—Nixon’s 1971 “shock” ending Bretton Woods convertibility—ushered in the fiat era. Untethered from monetary discipline, gold surged from $35 to ~$670 by September 1980, a 19x return over nine years, driven by double-digit inflation, oil shocks, and institutional distrust. This marked the first leg of the post-gold-standard bull cycle under the U.S. dollar’s fiat regime. 

The second leg (2001–2012) unfolded over eleven years, beginning around $265 in February 2001 and peaking near $1,738 in January 2012—a 6.6x return. 

This phase reflected a response to cascading financial crises and aggressive monetary easing: the dotcom bust, 9/11, the Global Financial Crisis, and the Eurozone debt spiral. Central bank interventions—QE and ZIRP from the Fed and ECB—amplified gold’s role as a hedge against fiat dilution. 

The third leg (2015–) began in late 2015, bottoming near $1,050 in the aftermath of China’s devaluation. Over the next decade thru today, gold climbed past $3,800—a ~3.6x return—driven by global central bank accumulation, geopolitical fracture, asset bubbles, inflation spillovers, and record leverage across public and private sectors. 

As a sanctuary asset, gold has not only preserved purchasing power but also signaled systemic fragility. Real (inflation-adjusted) prices have reached all-time highs, underscoring gold’s function as a monetary barometer. (Figure 2, lowest diagram) 

Today, its strength reflects more than cyclical momentum—it mirrors the widening cracks of the fiat era. 

Gold’s trajectory—marked by 9-, 11-, and 10-year legs—suggests that mining valuations may be more tightly coupled to global monetary dysfunction than domestic policy alone. 

With gold now approaching USD 4,000, history suggests we may well see prices reach at least USD 6,000.

For resource-driven economies like the Philippines, this episodic repricing offers a potent lens for evaluating mining equities.  Rising gold valuations, persistent inflation, and the flight to real assets amid waning faith in fiat systems suggest that mining performance may be more tightly coupled to global monetary dysfunction than domestic policy alone. 

Still, each leg has emerged from distinct fundamentals—past performance may rhyme, but not reprise. 

IV. Gold as Signal of Systemic Stress 

Last March, we launched a three-part series forecasting that gold would sustain its record-breaking run. 

In the first installment, we argued that gold has historically served as a leading indicator of economic and financial stress: "gold’s record-breaking runs have consistently foreshadowed major recessions, economic crises, and geopolitical upheavals."

Figure 3 

Today, that reflexive relationship remains in play. 

As global growth falters under the weight of fiscal imbalance and geopolitical strain, central banks have turned decisively toward rate cuts, reversing the tightening cycle that began in 2022. By September, the scale of collective policy easing has already approached pandemic-era levels, underscoring a synchronized monetary response to mounting economic stress. (Figure 3, topmost window) 

V. Fracture Points: Tumultuous Geopolitics and the New War Economy 

In the second part, we explored how monetary disorder underpins gold’s sustained upside. "Gold’s record-breaking rise may signal mounting fissures in today’s fiat money system, " we wrote, “fissures expressed through escalating geopolitical and geoeconomic stress. "  

Those fissures have widened. Over the past month, geopolitical tensions have intensified across multiple fronts, amplifying systemic risks for both commodity markets and global capital flows. In Europe, the Ukraine war has evolved from proxy engagement to near-direct confrontation, punctuated by Putin’s claim that "all NATO countries are fighting us." 

Hungarian Prime Minister Viktor Orbán echoed this unease, posting on X: (Figure 3, middle picture) 

"Brussels has chosen a strategy of wearing Russia down through endless war… sacrificing Europe’s economy, and sending hundreds of thousands to die at the front. Hungary rejects this. Europe must negotiate for peace, not pursue endless war." 

Paradoxically, Hungary is part of EU and NATO. 

In the Middle East, Trump’s proposed Gaza peace plan has been welcomed by parts of the EU but criticized by both Israeli hardliners and Hamas, exposing deep political rifts that could derail any lasting truce. 

Washington has also expanded its Caribbean military buildup apparently eyeing Venezuela—a Russian ally—under the pretext of targeting “drug smugglers.” 

Compounding these tensions are the looming U.S. government shutdown, ICE-fueled riots, EU fragmentation, and territorial disputes across Asia (including the Thai-Cambodia and South China Sea flashpoints). Together, these developments erode international interdependence and deepen the sense of global instability. 

VI. A Militarized Global Economy and The Fiscal–Military Feedback Loop 

Adding fuel to the fire, debt-financed fiscal stimulus through military spending has reached unprecedented scale. According to SIPRI, global military expenditures rose 9.4% in real terms to $2.718 trillion in 2024—the highest total ever recorded and the tenth consecutive year of increase. (Figure 3, lowest visual) 

This war economy buildup echoes historical patterns, where militarism became not just a tool of statecraft but a structural imperative. 

Modern defense economies increasingly resemble historical warrior societies such as Bushido Japan, Sparta, and Napoleonic France, where militarism evolved from a tool of power into a systemic necessity. 

In these societies, idle warriors or elite military classes threatened internal stability, compelling leaders to redirect aggression outward. Hideyoshi’s invasion of Korea, for instance, was less about conquest than about pacifying a restless samurai class. 

Today’s massive defense spending serves a parallel function: sustaining industrial output, protecting elite interests, and demanding perpetual geopolitical justification. The result is a fiscal–military feedback loop in which peace itself undermines the architecture of power. 

This militarized economic order breeds a dangerous paradox: when growth depends on arms production and deterrence, the line between defense and aggression dissolves. As nations over-arm to preserve influence and momentum, the world risks sliding into a self-fulfilling conflict dynamic—where fiscal expansion, political ambition, and national pride coalesce into the very forces that once ignited global wars. 

VII. Economic Warfare: Tariffs, Fragmentation, and Supply Chain Bifurcation 

These geopolitical flashpoints are layered atop escalating geoeconomic risks that mirror economic warfare. 

The U.S. has rolled out sweeping new tariffs—10% on lumber and 25% on furniture and cabinetry—adding to earlier steel and aluminum levies that have rattled European industries. With a stronger euro hurting export competitiveness and rising trade barriers disrupting supply chains, Europe’s manufacturing base faces mounting stress. 

The U.S. recently raised tariffs on Philippine exports to 19%, part of a broader “reciprocal” trade posture that threatens ASEAN and EU economies alike. Export controls targeting Chinese tech and semiconductor firms underscore the growing bifurcation of global supply chains, especially in the AI and chip sectors. 

VIII. World Central Banks Signal Distrust: The Gold Accumulation Surge and Fiat Erosion

Figure 4

Amid this widening fragmentation, central banks have accelerated their gold accumulation—buying despite record-high prices. 

As the World Gold Council reported, central banks added a net 15 tonnes of gold in August, consistent with the March–June monthly average, marking a rebound after July’s pause. Seven central banks reported increases of at least one tonne, while only two reduced holdings. (Figure 4, topmost and middle charts) 

Notably, as political institutions, central bank reserve management decisions are not profit but politically driven. 

The Bangko Sentral ng Pilipinas (BSP), additionally, was the world’s largest seller of gold reserves in 2024, citing profit-taking at higher prices. Yet in 2025, it resumed small purchases—ironically, at even higher price levels. (Figure 4, lowest graph)  

Figure 5 

Measured in Philippine pesos, gold and silver prices are extending their streak of record-breaking highs (Figure 5, upper window) 

As history reminds us, the BSP’s massive gold sales in 2020 preceded the 2022 USD/PHP spike, suggesting that the 2024 divestment—intended to support the peso’s soft peg—could again foreshadow a breakout above PHP 59, perhaps by 2026? 

Most strikingly, global central banks’ gold reserves have grown so rapidly that their aggregate gold holdings are now nearly on par with U.S. Treasury holdings—a clear sign of eroding faith in the contemporary U.S. dollar-based order. (Figure 5, lower image) 

The modern-day Thucydides Trap—intensifying hegemonic competition expressed not only in geopolitics, but also in economic, financial, and monetary spheres—has increasingly powered the gold-silver tandem. 

Viewed in this light, as gold rises against all currencies, the message is clear: it is not gold that’s appreciating, but fiat money that’s depreciating. Gold is no longer just insurance asset— it is, and remains, money itself. 

IX. The Paradox of Philippine Mining Reform: Bureaucratic Control over Market Forces 

In the absence of commodity spot and futures markets—a critical handicap to price discovery, risk management, and capital formation—the state’s default response has been to expand taxation and administrative controls instead of developing genuine market mechanisms. 

Rather than pursuing market liberalization or introducing commodity exchanges to improve efficiency and productivity, the Philippine social democratic paradigm of reform remains fixated on taxation, administration, and bureaucratic control. 

The passage of the Enhanced Fiscal Regime for Large-Scale Metallic Mining Act (RA 12253) and the push for the Mining Fiscal Reform Bill mark the government’s latest attempt to "modernize" the fiscal framework of the mining industry. 

On paper, these reforms promise stronger oversight, greater transparency, and a "fairer share" of mineral wealth between the state and the private sector. The new regime introduces margin-based royalties, a windfall profits tax, and project-level accounting rules meant to simplify tax compliance and reduce leakages. Yet, beyond the reformist veneer lies a system still anchored on bureaucratic discretion—where regulators retain broad authority to interpret profitability thresholds, accounting standards, and tax computations. 

In practice, this discretion perpetuates the opacity and arbitrariness that the law sought to correct. Rather than institutionalizing transparency, the framework risks entrenching regulatory capture, enabling bureaucrats to negotiate or manipulate fiscal obligations behind closed doors. 

The very mechanisms intended to enhance oversight—royalty audits, windfall assessments, and transfer pricing reviews—may instead become new venues for rent-seeking and selective enforcement. This tension between statutory ambition and administrative reality leaves the industry vulnerable not only to corruption but also to uneven enforcement across operators and regions—cronyism. 

In the short term, elevated metal prices could conceal these governance flaws, boosting fiscal receipts and lifting mining equities under the illusion of reform-led success. But when the commodity cycle turns, the cracks will widen: weak oversight, inconsistent standards, and arbitrary taxation could resurface as deterrents to investment and valuation stability. 

Thus, what was framed as a fiscal modernization drive may ultimately reinforce the industry’s old paradox—where boom times mask systemic fragility, and reforms collapse when prices fall. 

X. The Philippine Mining Index Breakout: Gold Leads, Nickel Surprises, Copper Lags and the Speculative Spillover 

Lastly, while gold mining shares primarily contributed to the breakout of the Philippine Mining Index, nickel mines also sprang to life and added to the rally. The Philippine Stock Exchange recalibrated the composition of the Mining Index last August to reflect sectoral momentum. 

Gold-copper Lepanto A and B replaced Benguet A and B, while gold-silver miner Oceana Gold was newly included.

Figure 6

This partial reconstitution, combined with price action, reshaped the index’s internal weightings: as of October 3, gold-copper mines accounted for 74.65%, nickel 23.53%, and oil just 1.83%—a notable shift from March 31’s 68.3%-27.44%-4.25% distribution. (Figure 6 topmost graph)

From March 31st to October 3rd, gold mining shares surged 112%, driven by tailwinds from soaring gold and silver prices. Nickel mining shares, surprisingly, jumped 66.4% despite depressed global nickel prices. Meanwhile, solo oil exploration firm PXP Energy sank 16.5%. 

The biggest ranked mines in the index, in descending order, were Apex Mining, OceanaGold, Philex, Nickel Asia, and Atlas Consolidated. (Figure 6, second to the top image) 

USD prices of Silver and Copper surging while Nickel consolidates. (Figure 6 second to the lowest visual) 

While gold’s rally was the primary engine of the index breakout—amplified by the inclusion of more gold-heavy names—the rebound in nickel miners was more ironic. 

With easy money fueling an “everything bubble,” a rising tide appears to be lifting all mining boats. 

Another factor is that local nickel miners have mirrored the moves of international ETFs such as the Sprott Nickel Miners ETF [Nasdaq: NIKL], which advanced largely on global liquidity flows rather than on improvements in the underlying metal market. (Figure 6, lowest diagram) 

In essence, the surge in nickel shares reflects financial rotation and speculative spillover—capital chasing laggards and cyclical exposure amid abundant liquidity—rather than any meaningful recovery in nickel fundamentals. If the bids are to be believed, nickel prices would eventually have to rise and remain elevated; otherwise, the rally risks running ahead of earnings reality. 

Meanwhile, despite a resurgent copper price—also mirrored in ETFs like the Sprott Copper Miners ETF [Nasdaq: COPP]—some local copper mines have made little progress in scaling higher. 

We are yet to see substantial breakouts from the peripheral mines, suggesting that speculative flows have been highly selective, favoring liquidity and index-weighted names over broader participation. 

Ironically, the divergence between copper and nickel prices underscores the fragility of the latter’s mining rally. 

While copper’s surge has been confirmed by both spot prices and mining equities—reflected in the coherent ascent of ETFs like COPP—nickel’s stagnation contrasts sharply with the outsized gains in nickel mining shares and ETFs like NIKL. 

This disconnect suggests mispricing: a speculative equity bid front-running a commodity rebound that hasn’t arrived. Without confirmation from the metal itself, the feedback loop sustaining nickel equities risks collapse, exposing the rally as a liquidity mirage rather than a durable trend. 

XI. Conclusion: The Uneasy Return of Hard Assets in a Soft-Money World 

The Philippine mining sector’s transformation from pariah to rising star is both cyclical and structural. It reflects not only higher commodity prices but also the global search for hard assets in an era of currency debasement, geopolitical fracture, and policy incoherence. 

Gold’s rise tells a story of distrust in fiat money; nickel’s divergence, of speculative excess born of liquidity overflow. 

The mining index’s ascent thus mirrors the world’s economic psychology—a blend of fear and greed, of safe-haven accumulation and ultra-loose money–financed speculative rotation. 

Whether this is a sustainable repricing or a liquidity mirage will depend on whether global monetary and fiscal regimes stabilize—or fracture further. The former seems close to impossible; the latter, increasingly probable. 

Either way, the Philippine mining story has become a proxy for something much larger: the uneasy return of hard assets in a soft-money world. 

Postscript: No trend moves in a straight line. Gold, silver, and Philippine mining shares are now extensively overbought—inviting a countercyclical pause, not an end, to their ascent. 

____

References 

Ludwig von Mises, The Real Meaning of Inflation and Deflation, January 2, 2024, Mises.org 

Prudent Investor Newsletter, Investing Gamechanger: Commodities and the Philippine Mining Index as Major Beneficiaries of the Shifting Geopolitical Winds! Substack, April 27, 2023 

Prudent Investor Newsletter, Phisix 6,650: Resurgent Gold, Will Mining Sector Lead in 2016? Negative Yield Spread Hits 1 Month Bill-10 Year Treasuries!, Blogspot February 15, 2016 

Prudent Investor Newsletter Do Gold’s Historic Highs Predict a Coming Crisis? Substack, March 30, 2025 

Prudent Investor Newsletter, Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order? (2nd of 3 Part Series), Substack, March 31, 2025 

Prudent Investor Newsletter, How Surging Gold Prices Could Impact the Philippine Mining Industry (3rd of 3 Series), Substack, April 02, 2025 

Prudent Investor Newsletter, The Long-Term Price Trend and Investment Perspective of Gold, Blogspot, August 02, 2020  

Is Gold In A Bubble?

``Gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium." - Murray N. Rothbard, What Has Government Done to Our Money?

In this issue:

Is Gold In A Bubble?

-Fed’s Quantitative Easing Update

-Misrepresenting Gold’s History

-The Misunderstood Role Of Central Bankers

-Appraising Gold And The Origin of Money

-Crack Up Boom Versus Bubble Psychology

Fed’s Quantitative Easing Update

The US Federal Reserve has vastly accelerated its purchases of US treasuries to the tune of about $7 billion, based on the data from the Federal Bank of Cleveland. This has been in breach of its self-imposed limits.

Likewise, the increased treasury purchases appears to be in line with the commencement of the next wave of mortgage resets that seems likely to signify as the next round of strains to the US banking system. As previously noted, ``With the risks of the next wave of resets from the Alt-A, Prime Mortgages, Commercial Real Estate Mortgages, aside from the Jumbo and HELOC looming larger, they are likely to exert more pressure on the banking system” [see past discussion in 5 Reasons Why The Recent Market Slump Is Not What Mainstream Expects].

Figure 1: Sifma, Zero Hedge: US Mortgage and US Treasury Market

Since the crisis erupted, the US government, through its GSE agencies, has virtually been THE mortgage market (see left window: blue bars FED agency mortgages, gray bars private labels).

We see the same trend for US treasuries, the US government via the Federal Reserve is on its way to become the buyer of last resort- since the activation of the QE program last March, Fed purchases (black line, right window) of US treasuries accounts for almost half of the market (Zero Hedge) displacing foreign official holdings (blue line).

The above developments dispel on the flawed notions that the US government will refuse to assume the literal role as the buyer of the last resort, especially under extreme circumstances. As a political institution, once a political expediency arises-such as a renewed threat to the survivability of its banking system that could risk undermining the US dollar standard system-the US Federal Reserve will act according to its perceived priorities. And the actions in the above markets have been telling.

Misrepresenting Gold’s History

The recent spike in gold prices has evoked shrill cries of a “bubble”.

Does rising prices automatically constitute as a mania? What distinguishes a mania from structural changes?

For us, the fundamental issue is to understand the role of gold in the marketplace or in the economy than simply presuppose or generalize a bubble.

Basically, the gold debate can be delineated into two extreme camps: the gold bugs (ideological believers that money should be comprise or be backed by gold or commodity) and its antipode (ideological believers influenced by JMKeynes where gold or commodity as money is deemed as relic or a “barbaric metal”).

Of course the issue can’t be seen as simply black or white because the mainstream fundamentally operates on gray areas, out of the lack of understanding. But have mostly been tilted towards the “Barbaric” metal persuasion.

Here are some examples, (bold emphasis mine)

The Bloomberg quotes the highly distinguished trader Dennis Gartman, ``The gold bull run is not predicated upon inflation but is instead predicated upon the notion that gold is becoming a reservable asset.”

Or from Socgen’s Dylan Grice, ``How can something with no cashflow or earnings power be valued? The simple answer is that it can't be. Intrinsically it is pretty much worthless.”

Ironically Mr. Grice predicts that the price of gold to reach $6,300 primarily because of bubble psychology, the discount value of Gold relative to US dollars issued and “insolvent governments”.

On the other hand, Mr. Gartman does not qualify on the definition of, as well as, elaborate on WHY and HOW gold is “becoming a reservable asset”.

For the Barbaric metal camp, Gold is presented mostly as an unworthy investment (see figure 2)

Figure 2: Socgen: Real Prices of Gold

According to Mr. Grice, ``But the same chart also shows how unreliable gold has been as a store of wealth. A 15th century gold bug who'd stored all of his wealth in bullion, bequeathed it to his children and required them to do the same would be more than a little miffed when gazing down from his celestial place of rest to see the real wealth of his lineage decline by nearly 90% over the next 500 years (though he might take comfort from the knowledge that his financial advisor would be burning in hell). More recently, had you bought at the peak of the last bull market in January 1980 for $850, you'd have suffered a nominal decline of 70% by the time it bottomed in 1999. On an annualised basis you'd have lost 6% pa nominal and 9% real.” (bold highlight mine)

Mr. Grice’s premise seems plausible but blatantly misleads. Why?

Simply because Mr. Grice forgets to remind us that gold (including silver) was NOT held for investment, but was instead USED as money during the aforementioned eras.

And as money, gold and or silver was subjected to liquidity flows depending on the society’s perception of uncertainty, which ultimately determines the level of demand for money relative to the available supply of money. To quote Austrian economist Hans-Hermann Hoppe, ``The holding of money is a result of the systemic uncertainty of human action.”

For instance, in the mid 16^th century the fall of the real price of gold (exchange value relative to other commodities) was mainly due war “conquest” financing.

According to Professor Niall Ferguson in his latest book The Ascent Of Money, ``during the so-called “price revolution”, which affected all of Europe from the 1540s until the 1640s, the cost of food-which had shown no sustained upward trend for three hundred years-rose markedly.” [italics mine]

Professor Ferguson’s account appears very consistent with the real price trend of gold on the chart, especially on the 300 years prior to the eon of war financing.

Moreover, following the Spanish conquest of the Inca Empire by a Spanish colonel Francisco Pizzaro, huge precious metals (money) streamed into Spain, many of which came from the Potosi (otherwise known as Domingo de Santo Tomas-mouth of hell) mines in Bolivia.

Again from Niall Ferguson’s Ascent of Money, ``between 1556 and 1783, the rich hill yielded 45,000 tons of pure silver to be transformed into bars and coins in the Casa de Moneda, and shipped to Seville…Pizarro’s conquest, it seemed, had made the Spanish crown rich beyond the dreams of avarice.” Thus, the relative surplus of gold and silver against other commodities explains anew the depressed real prices of gold and is consistent with the price action of gold chart above.

Yet going into the industrial revolution in 1800s-1913, one would observe that the real price of gold has mostly stabilized.

Notes Professor Michael Rozeff, ``Before there is a central bank and when metals are being used in the money and banking system, there is greater price stability. There is no contest. Pre-1913, the price level falls gently each year on the average by less than ½ of one percent. After 1913, the price level rises each year by 6.8 times as much as it used to decline before 1913 (in absolute value.)” [italics his]

Following the introduction of the US Federal Reserve in 1913, real prices of gold have gyrated mostly higher over time. And the upside volatility has been accentuated after the Nixon Shock or when former President Nixon closed the gold window or ended the Bretton Woods system on the 15^th of August 1971.

In other words, the chart above from 1265-1971 or in 7 centuries gold chiefly performed the role of money. Today, this hasn’t been the case...yet.

To conclude, to use gold real prices as a metric to justify on gold’s poor investment returns is highly inconsistent, flawed and a misrepresentation. Gold’s role today isn’t like in the past where gold functioned as a medium of exchange, which should be nuanced from the current role as non-money commodity.

To add, since gold isn’t used in transactions by the general public today, then fundamentally gold isn’t money. Only to the eyes of central bankers could gold be deemed as a form of money. Thereby comparing gold as money and gold as non-money is like comparing apples to oranges.

The Misunderstood Role Of Central Bankers

Some have cited the activities of central banks as possible indication for inflection points on gold prices. For instance, the sale of UK Chancellor Gordon Brown of 400 tonnes of gold reserves in 1999 coincided with the end of the bear market. In other words, central bankers are thought to resemble retail investors, whom traditionally play the role of the greater fool during market extremes.

Yet like all human beings, while central bankers are subject to the corporeal frailties and could be influenced somewhat by the developments of the marketplace, what seem glaringly overlooked by mainstream’s oversimplification are the governing incentives from which the political bureaucracy operates on.

As Professor Ludwig von Mises rightly notes of the crux of the distinction, ``For it is a fact that as a rule the authorities are inclined to deviate from the profit system. They do not want to operate their enterprises from the viewpoint of the attainment of the greatest possible profit. They consider the accomplishment of other tasks more important. They are ready to renounce profit or at least a part of profit or even to take a loss for the achievement of other ends.” (bold emphasis mine)

So unlike typical investors driven by profits, political leaders and the bureaucracy, being political actors, fundamentally operates on political goals. In short, central banks transactions in the marketplace may represent price insensitivity, and importantly, are most likely subject to political ends that may be extraneous to market forces.

Manias are essentially founded by a massive credit boom and underpinned by government policies to create boom conditions, from which induces investor irrationality responses based on expectations of perpetually easy profits. Therefore, a gold mania cannot mechanically be attributed to central bank activities because this would highly depend on the underlying political goals in support of their activities.

Furthermore, a mania depends on pyramiding leverage or accelerating credit boom. At the present moment, central bank buying of gold has been funded from their stash of US foreign exchange surpluses.

The tiny resort island of Mauritius recently followed India to acquire 2 metric tons from the IMF (Bloomberg).

Figure 3: Virtual Metals: Gold Demand Trends, Central Banks As Net Buyers

In addition, central banks accounted for as net buyers for the second successive quarter this year, where according to mineweb.com, ``the official sector was a net purchaser of gold in the third quarter, although the figures are low, at five tonnes in Q2 and 15 tonnes in Q3. The underlying trend is "expected to remain intact" as central banks, like private investors, continue to look for diversifiers, especially with respect to the dollar. Central banks outside the CBGA agreement that the WGC identified as gold purchasers included Mexico and the Philippines.” (see Figure 3-right window)

It is noteworthy that gold prices continue to rise, in spite of the massive net gold sales by the official sector even when gold’s bullmarket has been on the fringe.

Again from mineweb.com, ``at the end of 1998, world central bank holdings of gold amounted to 33,500 tonnes and that by the end of 2008 this was down to 29,700 tonnes so that the rate of disposal over the decade was the fastest in history - and still the price doubled.”

The important point is that the complexion of gold’s pricing dynamics has been significantly transforming from traditional “jewelry” based to “investment” based (left window). And this has been responsible for today’s buoyant gold prices, even in the face of central bank selling.

There is no better way to parse on central banking mindset than from their statements or “rationalization”. Mineweb’s Rhona O’Connell covers M. Paul Mercier, the European Central Bank's Principal Advisor in Market Operations, who in a recent speech gave four reasons why central bankers value gold.

From Ms. O’Connell (all bold and italics emphasis mine), ``The four primary reasons for a central bank to hold gold were listed as follows:

-Economic security. The physical and chemical characteristics of gold with its high density and resistance to oxidation, for example (unlike silver, the oxidation of which is the cause of tarnishing) combine with the fact that it is the only asset that is no-one else's liability to make it a vital element of foreign exchange reserves. Holding another party's securities always carries the possibility that the behaviour of the counter-party can affect the value of those securities.

-Unexpected needs. There is always a possibility, albeit very low, of highly damaging developments such as war or high inflation that can have a severe impact on sovereign debt, or result in a country's isolation. As the ultimate global means of payment gold is an important insurance policy. It can also be used as international collateral (for example the loan to the Banca d'Italia from the Bundesbank in the early 1970s).

-Confidence. Although gold no longer backs currencies in circulation, M. Mercier argued that it helps to underpin international confidence in any one currency, especially since, without gold's formal backing, currency values are based on faith in one another. He reminded us of the IMF's recent reiteration of the IMF's statement about hoe gold gives a "fundamental strength" to its balance sheet.

-Risk diversification. This, he asserts, is probably even more highly valued by central banks than it is by other investors. There is a considerable body of study that quantifies the ways in which gold brings robustness to a portfolio, most notably, for a central banker, the reduction in volatility.”

Ironically after selling 3,800 tonnes over the period where central banking dogma thought that they have successfully lorded over inflation [see Rediscovering Gold’s Monetary Appeal], counterparty risks, insurance, confidence and risk diversification suddenly becomes an issue for central bankers in reconsidering gold sales.

What has impelled them to raise such concerns?

Obviously signs like this… (all bold emphasis mine)

The Financial Times on India’s IMF’s gold’s purchase, ``Pranab Mukherjee, India’s finance minister, said the acquisition reflected the power of an economy that laid claim to the fifth-largest global foreign reserves: “We have money to buy gold. We have enough foreign exchange reserves.” He contrasted India’s strength with weakness elsewhere: “Europe collapsed and North America collapsed.”

Unsettling concerns over new bubble cycles emanating from the low interest rates regime implemented by the US Federal Reserve as articulated by the Chinese and Japanese leadership, from Bloomberg, ``“The continuous depreciation in the dollar, and the U.S. government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” Liu, chairman of the China Banking Regulatory Commission, said in Beijing yesterday.

``While lower interest rates will help Americans pare debt, “there are also risks involved in continued low rates,” Shirakawa said today at a Paris Europlace Financial Forum in Tokyo. Having borrowing costs near zero may strain government finances if it spurs speculation that the dollar will continue to slide, he said, while warning that easy policy by officials globally may have repercussions in the long term.

``“Monetary easing in advanced economies has stimulated capital inflows to emerging economies,” Shirakawa said. If emerging nations continue to recover at a faster pace than advanced ones, they “might overheat and experience financial turmoil, triggering a recession,” he said.

Hong Kong’s monetary authority likewise includes the FED’s Quantitative Easing program aside from the prevailing low interest regime over concerns on formative bubbles, this from the Wall Street Journal, ``“The question one really has to ask is to what extent quantitative easing is necessary. Is the dosage right, because $2 trillion is a lot of money in the banking system, it’s high power money,” said Norman Chan, monetary authority chief executive. He and Ms. Yellen were at a forum sponsored by the Institute of Regulation & Risk. Ms. Yellen gave a speech that touched on how policymakers should address future asset bubbles.

“In Asian economies, Hong Kong included, we have seen a very massive inflow of funds that is explainable by the very low global interest rates and coupled with this huge amount of quantitative easing,” Mr. Chan said. “This question of potential risk of asset bubbles forming if this is to continue for a long period of time is a big challenge for us,” he said to Ms. Yellen.”

Basically, it’s been a predicament for Asian central banks to raise interest rates because higher rates will widen the currency yield spreads in their favor and exacerbate inward money flows. This, in essence, will blow the region’s asset bubbles faster. Yet by suppressing interest rate asset bubbles could be internally generated.

To quote CLSA’s high profile strategists Christopher Woods (highlight mine), ``The irony is that the more anaemic the Western recovery proves to be, the longer it will take for Western interest rates to normalize and the bigger the resulting asset bubble in Asia. Emerging Asia, not the U.S. consumer, will be the prime beneficiary of the Fed's easy money policy.

And the prospect of fostering asset bubbles has prompted for Asian central banks to consider imposing capital controls.

So Gartman’s argument where “gold is becoming a reservable asset” increasingly seems as a protective or insurance cover against the possible impacts from globalized systematic inflation (instead of no inflation), such as blossoming asset bubbles, emerging malinvestments, rampant speculation, financial and economic imbalances, arbitrages and carry trades, ballooning systemic leverage and surging inflation, which could all end up in tears. All these signify as inexorable monetary disorder.

In other words, many central banks have been insuring themselves, from inflation and counterparty risks by taking on gold as reservable asset. In short, gold’s appears to be gradually regaining its role as money.

Yet it would also be a grievous mistake to read bubbles as routinely blowing and popping without taking into account the magnitude where bubble cycles are becoming larger in scope and more damaging in scale upon impact when the mean reversion occurs.

Figure 4: Socgen, wikipedia: Central Bank Gold Shocks, Zimbabwe Dollar

A more fatal mistake would be to misjudge the impact from a lethal policy mix of flagrant money printing programs and low interest rate regime that could transmogrify a bubble cycle into hyperinflation.

So while global central banks could be buying gold today as shield against bubble cycles, they and everyone else would be stampeding into gold if and when the risks of a currency crisis becomes imminent.

Hence basing a projection on past performance (left window figure 4), where central banks bought during the 70s, which eventually turned into 2 gold shocks of sharply higher gold prices, assumes that present monetary disorder would be resolved in the traditional sense. We aren’t that confident. And Zimbabwe’s real life hyperinflation (right window) which ended last year should serve as reminder.

Appraising Gold And The Origin of Money

Many have made the case of valuing gold by discounting currency in circulation with that of available gold reserves.

As in the case of Socgen Dylan Grice, “So one way to value gold, therefore, is to ask at what gold price the value of outstanding central bank paper would be completely backed by gold. The US owns nearly 263m troy ounces of gold (the world's biggest holder) while the Fed's monetary base is $1.7 trillion. So the price of gold at which the US dollars would be fully gold-backed is currently around $6,300.”

Or based on Professor Michael Rozeff’s Zero Discount Value where ``value for gold such that every outstanding dollar liability in the central bank’s monetary base (currency plus bank reserves) is backed by an equivalent dollar’s worth of gold. It is what the dollar price of gold would be if the central bank’s liabilities were 100 percent backed or covered by gold.”

From our point of view, while these hypotheses could serve as meaningful concepts to measure gold, they are predicated on the assumption where variables (as monetary base) remains stable, secondly the world currency system persists on operating under the present US dollar standard, and lastly assumes that gold’s valuation in the light of current and constant conditions, hence won’t likely serve as accurate barometers, in my view.

Since we believe the world operates in a highly action-reaction dynamic, the complexity of the distribution isn’t likely to lead into a modeled outcome that can be easily captured by math estimates.

Instead we believe that policy actions are likely to be more of an accurate gauge to implied directions of the marketplace.

And it would also be true, to affirm with the behavioral camp, that human emotions will be an elaborate part of the price setting of gold, and thus is likely to cause price exaggerations beyond any models especially in bubble cycles.

In addition, while it seems conceivable to argue that gold’s rise could be a function of a bubble psychology, as per Socgen Dylan Grice, ``If my "valuation" of gold strikes you as a desperate attempt to value something which can't be valued, it's no different from metrics such as the "market cap to clicks" or "ARPU" ratios which were used in the late 1990s during the technology bubble when demand for bullish "valuation analysis" mushroomed”, this observation is far from accurate.

Yet Mr. Grice borrows some monetary aspects to rationalize an argument for a bubble cycle, ``Like today, central banks weren't buying gold in the late 1960s to prop it up, they were abandoning attempts to prop up the dollar.”

Using behavioral aspects he adds, ``Today, central banks are monetising government deficits to accommodate the recessionary effect of the credit crisis. Then the convincing narrative was that with the Middle East controlling our energy from abroad and aggressive trade unions rampant at home, policymakers were no longer in control. Today, the perception of central bank infallibility has been permanently ruptured by their collective failure to see the 2008 crash coming. Nagging concern at their over-willingness to inflate, at the blurring of monetary and fiscal policy and over long-term government solvency gives traction to a similar narrative today.”

In short, Mr. Grice utilizes the behavioral finance perspective to argue for a gold bubble and simultaneously disparage gold’s role in society.

The idea that gold is intrinsically worthless is to argue against 4,000 years of history whereby gold or silver has accounted for as money. To quote Murray Rothbard in What Has Government Done to Our Money?, ``Money is not an abstract unit of account, divorceable from a concrete good; it is not a useless token only good for exchanging; it is not a claim on society; it is not a guarantee of a fixed price level. It is simply a commodity.”

Yet gold, as commodity money, didn’t just pop out of nowhere, nor had they been they imposed by Kings or political leaders to be accepted by their constituents as money. On the contrary, historical evidences reveal that money evolved from the market’s selection process.

Some earlier forms of money that were used in select societies, such as cowrie shells in Maldives, peppers and squirrels skins in parts of Europe (The Ascent of Money), fish on the Atlantic sea coast of colonial America, beaver in the old Northwest, and tobacco, in Southern colonies (Rothbard-Mystery of Banking) salt, sugar, iron hoes, feathers, leaves and seeds, land to even huge stones weighing up to 500 lbs in the Pacific Islands of the Yap, failed to generate wider acceptance.

Instead, commodity metals, particularly of the precious metals family –gold, silver and copper- had been largely adopted due to its marketability.

According to Professor Ludwig von Mises in The Theory of Money and Credit, ``There would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained. Which was universally employed as a medium of exchange; in a word money.”

Aside from marketability, commodity money has acquired its role due to added special traits as being highly divisible, portable, high value per unit weight and highly durable (Rothbard-Mystery of Banking).

Yet money in a conventional sense, to quote Professor Niall Ferguson in The Ascent Of Money, is a medium of exchange, which has the advantage of eliminating inefficiencies of barter; a unit of account which facilitates valuation and calculation and a store of value, which allows economic transactions to be conducted over long periods as well as geographical distances.

In other words, it would seem incoherent, if not self contradictory or plain arrogance, for anyone to claim that an object is intrinsically useless yet is considered as the most marketable combined with special traits for it to assume the role of money for thousands of years. It’s like arguing that Manny Pacquiao is a loser in spite of snaring a world record breaking title win!

Crack Up Boom Versus Bubble Psychology

Yet forecasting gold prices at $6,300 driven by plain narrative based bubble psychology is like proposing to buy or exchange something you own for something that is essentially a chimera. Or simply, would you buy rubbish simply because everybody else is doing so? How logically consistent can this be? To recall Warren Buffett’s priceless words of wisdom, ``the dumbest reason in the world to buy a stock [or any investment –mine] is because it's going up.”

Furthermore, the argument for a ‘displacement’ that would trigger a bubble cycle predicated on the rationale of “insolvent governments” ignores the psychology that drives money-FAITH.

In essence, bubble psychology deals with investor irrationality, cognitive biases and the animal spirits, which eventually revert to the mean. It underestimates and overlooks on the impact of the bubble cycles on monetary health conditions and sees a limited effect only to investment assets.

On the other hand, the truism is that money is driven by trust or faith accrued over the long years of established virtues or properties acquired which allowed money to assume its role. Confusing one for the other would be misleading.

Figure 5: Casey Research: Weimar Hyperinflation: How Faith Evaporates

As to how faith in money can vanish (see figure 5-the Weimar Germany experience) beyond the realm of behavioral finance, again this quote from Prof. von Mises, ``But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.”

In finale, my view of rising gold prices is that it reflects on a burgeoning global monetary disorder based on the incumbent operating currency platform (US dollar standard) more than simply bubble symptoms. It’s more than a narrative; it is an underlying degenerating malaise that places at risks faith in our money.

Although a gold bubble cycle CANNOT be discounted, we’d like to see evidences of a credit driven euphoria underpinning private or public sector acquisition. Absent credit expansion, which is the sine qua non fuel for any bubble, rising gold prices signify as a symptom.