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Weekend Reading: Gold demand falling. Global conspiracy on hold?

Weekend reading

Good reads from around the Web.

There are probably several reasons why the gold price soared over the last decade. Pulling apart the exact drivers for the valuation of this weird commodity-cum-currency-cum-trinket is notoriously difficult.

Personally, I believe a combination of – in chronological order –  the arrival of cheap and accessible gold price ETF trackers, low/negative real interest rates, and economic meltdown mania did the bulk of the heavy lifting. Plus Gordon Brown (who sold most of the UK’s gold near $200) clearly did something awful in a previous life.

Unlike many personal website proprietors, I see stockpiling by genius investor savants who’ve correctly predicted the demise of fiat currency from their shacks in Alabama as playing a relatively minor role.

But I shouldn’t be too smug; I too continue to follow the gold price like some prehistoric Ape-man wondering who drives the sun.

Not only is the price of gold now down around $1,600, but demand also seems to be falling:

global-gold-demand

Source: Business Insider

The graph shows demand falling by tonnage, though the World Gold Council has pointed out that in dollar terms, 2012 was still a record.

The collapse in jewellery demand is interesting. Here we see the economics of most commodities at play – as the price soars, demand tends to fall because fewer people can pony up, whether they’d like more of it or not.

So who is buying? Besides the “investment” category (which I still think could turn on a dime) the main driver seems to be Central Bank buying. Emerging market countries in particular have been big net buyers.

I have changed my tune on gold in the past few years, as I’ve admitted before. At first I was dismissive of the asset, but I’ve come to see the point of a small allocation – say 2-5% – for diversification reasons.

I do believe gold is different in a world where most assets are increasingly correlated – though I’m not sure this isn’t just a self-fulfilling prophecy.

In other words: Because enough people believe gold is special, it is.

The price would probably have to fall another $300-$600 or a good few years would have to pass before I’d consider building a meaningful allocation, however.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: RBS has upped the interest-free period on its Platinum balance transfer credit card to 24 months, but watch out for transfer fees, warns The Telegraph. Barclaycard has a better offering for those who can get it. (Remember, shuffling debt is not a long-term solution).

Mainstream media money

Note: Some links are to Google search results – these enable you to click through to read the piece without you being a paid subscriber of the site.

Passive investing

Active investing

  • The Australian stock market looks expensive…  – iShares blog
  • … and Europe isn’t as cheap as they say, either – FT
  • Ray Dalio’s All Weather Portfolio strategy – Learn Bonds
  • Dividends plus buybacks: Total yield – Fortune
  • It’s risky trading the stocks of bankrupt companies – Swedroe/CBS

Other stuff worth reading

  • Africa: Calling patient investors [Search result]FT
  • Halifax claims buying is £120 a month cheaper than renting – Telegraph
  • Alternative assets are a heaven for fraud – New York Times
  • Funds flows follow investment returns, not vice versa – The Economist
  • Buy-to-let lending hits a four-year high – The Guardian
  • 3D printing will change the world – Harvard Business Review
  • Dilbert creator Scott Adams loves our robotic future – Dilbert.com

Book of the week: I used to read a new investing book a fortnight, but these days I tend to re-read a select few that speak more wisdom every time. Currently it’s Howard Mark’s brilliant The Most Important Thing.

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{ 23 comments… add one }
  • 1 SG February 16, 2013, 7:11 pm

    My thoughts exactly. I think the long increase in the gold price is mainly anticipatory of the mess we’re in and moderate inflation yet to come. I don’t think hyperinflation is round the corner and I don’t think the gold price has a lot further to go. As it falls it will become more attractive and I could see myself buying a little from time to time, but much further down the road.

  • 2 John February 16, 2013, 7:21 pm

    As a hardcore, bonafide certified gold and silver bug and equity/rela estate/bond bear, who is 100% invested in gold and silver I would like to go on record as making the following concrete predictions:

    1) Monevator’s ambivalence and antipathy towards precious metals (relative to equities, bonds, real estate and fiat currency) will prove to be a monumental blind spot in what is otherwise a fabulous personal finance blog.

    2)The Dow:gold ratio and the FTSE:gold will drop below 1 within the next 5 years.
    Current values are 8.7 and 6.1 respectively
    http://www.coinmine.com/WhatYouShouldKnowAboutCoins/WhyBuyCoins/dowgoldratio2006.jpg
    http://www.goldmadesimplenews.com/wp-content/uploads/2011/08/FTSE-GOLD-ratio-august-5.2.png

    3) A median priced UK house will be priced at <500oz of silver and <50oz gold within the next 5 years.
    This currently equates to ~ £52,000 worth of gold, or ~ £9600 worth of silver
    http://gold.approximity.com/since1930/UK_House_Prices_in_Gold_LOG_GUESS.png
    http://gold.approximity.com/since1968/UK_House_Prices_in_Silver.png

    4)The current sovereign bond bubble will implode (UK Gilts currently near 300 year highs, US Treasuries at 250 year highs

    http://www.nypost.com/p/news/business/bond_bubble_bust_z56Re3oMqGIjsYzwjb4khO

    4)All those who have as little as 0-5% of their portfolio invested in precious metals, and 95-100% invested in equities, bonds, real estate and fiat currency will have their asses handed to them by the “goldbugs” over the next 5 years (this will be the vast majority of the followers of this blog I would imagine).

    4)This Monevator post will mark a major interim bottom in the secular precious metals bull market (gold and silver both currently below 200 MDA)

    I understand that arguments for and against precious metals are unlikely to change opinions in either camp, as views on this subject tend to be quite entrenched and polarised.

    I just wanted to stick my neck out by making some concrete predictions, so that we can all revisit this post and associated comments in the future to see how things pan out.

    I cannot wait!

  • 3 ermine February 16, 2013, 8:22 pm

    Hey, John

    Make it real. Take your statement #2, which is the only one that I could identify that is testable on an objective basis. If either of those predictions fail in the next 5 years, are you going to mail Monevator a gold sovereign or two by COP Feb 16, 2018.

    Assuming, obviously, that we still have an Internet and working mail service after the impending war of all against all.

    Hell, I can be gloomy at times. But you’re talking Second Coming there. It’s not gold that people need in their portfolios. It’s tins of beans, salt beef and serious heat…

  • 4 UtOh February 16, 2013, 8:26 pm

    Must. Not. Feed. The. Troll.

  • 5 John February 16, 2013, 9:01 pm

    Happy to take up bet with an ounce of silver

    2) and 3) are both testable

    I will define 4.1) as the yield on the 10 year Gilt or US Treasury >5%, which makes it refutable. This equates to a loss of capital of >60%.

    Agree others are subjective, but will make a prediction than a simple 100% gold or 100% silver portfolio will greatly outperform any of the “conventional” portfolios on this board over the next 5 years.

  • 6 laura February 16, 2013, 9:13 pm

    Thanks for the shout out! Have a great weekend!

  • 7 Jane Savers @ The Money Puzzle February 17, 2013, 1:06 am

    Every day I am bombarded with television commercials and direct mail advertising to sell my old gold jewellery. The pawn shops and jewellers in town are all buying and my small Canadian city had several events in banquet halls hosting out of town gold and jewellery buyers. Huge line ups and long waits to sell your gold items.

    Is it possible that all this gold reentering circulation has lowered the price because the supply has increased?

  • 8 Monk February 17, 2013, 10:53 am

    I read a few hedge fund unwound their long gold positions in the run up to 31 December Jane, so I guess there’s more of the same going on now that their quarterly disclosures revealed as much.

    None of that though is relevant to the store of wealth argument, nor the John versus’ the Monevator guantlet tossed down above.

    Such gauntlet tossing makes me think that the one thing we do know is this time it is different, highlighted by the repeated references to the QE experiment in the popular media, begging the question if it’s different, should we assume that the outcome will be as before?

    I know gold over the long term has always kept a value and the $ when tied to the gold standard always kept its value, but in both cases it is an artificial value created by humans and maintained as such given that it has no real value other than its alleged rarity.

    It seems to me the only thing going for gold is that people panic buy in times of trouble, (except that they didn’t in 2008/09 suggesting that like most financial markets, speculation and credit seriously distorts prices), but putting that aside, the only argument I can see is for holding gold is as a percentage of your portfolio for diversification purposes, primarily because purely no one can really predict the future, not with any accuracy or realistic conviction, they can only plan, hope or ignore.

    I’d hate to have spent my life being 100% long gold only to be proved right after I died, but having missed out on everything else.

    There’s more to the long game than just playing at it.

  • 9 ermine February 17, 2013, 11:03 am

    > There’s more to the long game than just playing at it.

    Indeed. Surviving it seems to be the issue – Keynes said it well

    “The long run is a misleading guide to current affairs. In the long run we are all dead.”

  • 10 Retirement Investing Today February 17, 2013, 7:33 pm

    Hi TI

    “I’ve come to see the point of a small allocation – say 2-5% – for diversification reasons.” A person after my own heart. Exactly the reason I target a holding of 5% within my portfolio. Over the past few years it’s served me well. The volatility of gold has benefit when used this way.

    In fact my non emotional mechanical method nearly has me purchasing the yellow stuff again. The recent run up in equities, pull back in gold plus some new money has my 5% allocation nearly down to 4%. A buy trigger will be hit at 3.75%.

    Cheers
    RIT

  • 11 Arthur February 17, 2013, 9:39 pm

    An entertaining article by The Undercover Economist on gold can be found at:

    http://timharford.com/2013/01/the-bundesbank-takes-back-its-doughnuts/

    Just like to add how much I enjoy the Monevator blog.

  • 12 Neverland February 17, 2013, 9:48 pm

    Gold doesn’t provide a yield…

    …but then what does provide much of a yield these days?

  • 13 The Investor February 18, 2013, 10:42 am

    @John — Fair enough for putting down some figures, but I’m not going to “bet” against you. Punting one asset class against another is notoriously difficult, but when one is the essentially “un-valuable” gold (i.e. it cannot be valued by conventional measures, not that it’s worthless) that goes treble.

    I wouldn’t disagree with your general outlook for government bonds. I currently hold none, and use cash and NS&I certs as a (very imperfect) proxy. I can absolutely see why someone would maintain some allocation, particularly at the short end, for risk reduction.

    I don’t want to be rude, but personally I’d say even if you “win” with 100% gold, I personally think you’ve taken an inordinate risk for that return.

    After five years of being told by people that the FTSE 100 was going to 1,000, that UK unemployment would hit 10million, that France would leave the Eurozone next Tuesday etc, and then vanishing when their “obvious” predictions don’t come true — I do wonder whether you’ll show pop up in five years if gold doesn’t deliver. But I won’t prejudge, and hope you prove me wrong. 🙂

  • 14 The Investor February 18, 2013, 10:43 am

    @Arthur — Thanks for the link, and for your generous review. 🙂

  • 15 John Law February 19, 2013, 10:25 am

    Hi Monevator,
    I would like to compliment you again on your fabulous blog. It is probably the best single source of information on passive equity investing in the UK.

    I’m a great believer in cycles investing (see Mike Maloney’s précis at wealthcycles.com).

    Precious metals are in the middle of a 13 year secular bull market. Equities are are similarly enjoying a 13 year bear market. The easiest way to see this is to chart the Dow:gold ratio of time.

    http://www.denaria.es/wp-content/uploads/2012/03/dowgoldratio2006.jpg

    In my opinion, this cycle will continue and the ratio drops below 1. This technical outlook fits neatly with the macro-economic fundamentals for gold(negative real interest rates and currency debasement) and equities (G7 economies in recession or near recession).

    Ditto housing vs precious metals

    http://www.moneyweek.com/investments/property/uk/britains-secret-house-price-crash-13701

    http://www.moneyweek.com/~/media/MoneyWeek/2011/110905/UK-house-prices-and-gold-1.ashx

    When the cycle turns, I will need all the experience and expertise on this blog to allocate my precious metals position into equities and real estate.
    At this point precious metals (i.e. cash) will be overvalued, and equities and real estate will be undervalued.

    I think it is fair to say that nearly all secular bull markets end in a speculative blow-off followed by a crash (Nikkei 1989, NASDAQ 1999, US housing 2007, precious metals 1979). I don’t think we are there yet.
    I don’t think “this time will be different”.

  • 16 John Law February 19, 2013, 10:36 am

    I would like to make another point about the UK Gilt bubble (currently bursting from a 300 year high). Bonds represent frozen GBP’s. When the bond bubble bursts, rational investors will stop rolling gilts over and cash out and flee GBP’s, releasing £1 trillion of new currency into circulation.

    At this point, prudent investors will do very well to understand the difference between nominal returns and real returns in other investment classes such as equities. Note that the Zimbabwe stock market was the best performing in the world over the last decade in nominal terms. Kyle Bass (one of the savviest Hedge Fund Managers in the world makes this point better than I can:

    http://www.zerohedge.com/news/2013-02-01/kyle-bass-tells-nominal-stock-market-cheerleaders-remember-zimbabwe

    When the bond bubble bursts, anyone with assets denominated in fiat will will suffer, not just bond holders. This is why it is better to look at ratios of one asset class to another to get a clearer idea of where we are in the business cycle.

  • 17 John Law February 19, 2013, 10:50 am

    If you think I’m being unfair in describing a 13 year secular bear market in equities using e Dow:Gold ratio, what about using another tangible asset which cannot be printed as the denominator?

    How about the historical Dow:oil ratio?

    http://www.moneyweek.com/~/media/MoneyWeek/2010/101220/12-10-22-MM03.ashx?w=450&h=300&as=1

    This clearly shows that we are in a dead cat bounce from a parabolic 1999 peak, and that there is plenty of room to the downside before equities bottom.

  • 18 The Investor February 19, 2013, 11:09 pm

    @John Law — I am not claiming to have a better / more accurate opinion of gold than you. You may be right about the price heading higher. I simply don’t know how to value gold, though I would say I agree your method of comparing it with other asset classes is probably as good as any other. I would bet that the gold price will be higher in 50 years time, but I genuinely would not be confident about anytime between then — it could be five times higher or half the price or anything else, as far as I can see.

    Where I would have an argument — and it’s your money, so your choice, but figuratively speaking — is with going 100% long in gold.

    This is so far off any investing advice you read from anyone except from the fringe (and fair enough, you have identified yourself as a gold bug so you’re not claiming otherwise) that it surely must at least give you pause.

    Let’s say you’re right, and everything but gold collapses. In such circumstances you’d still do well if you were say 60% gold, which is still enormously massively overweighted to gold in any investment schema since King Solomon. You’d still do very well and could mop up afterwards, despite your losses on cash and shares, and maybe a handful of bonds just in case there’s a depression. Nobody except the fringe has anything close to 60% of their wealth in gold, so you’d be a relatively very rich man in such a scenario, assuming you started with a reasonable wodge.

    But let’s say you’re wrong. Gold could trivially fall 50-75%, it’s done so from previous peaks many times. In this case, you get far poorer relatively speaking (as other assets in that scenario would likely deliver a real return, too, leaving you even further behind).

    Even if I had your views, which I don’t, I’d still never make the bet you’d made.

    “There are two kinds of people who lose money: those who know nothing and those who know everything.” – Henry Kaufman

    Best of luck, anyway.

  • 19 Fred@Foxy Finance February 19, 2013, 11:23 pm

    I keep gold in my portfolio because it is the basis of all currencies so it will always hold value!

  • 20 The Investor February 20, 2013, 12:38 am

    @Fred — Thanks for your comment, although I do not agree.

    Gold fell roughly 70% in nominal terms between 1980 and the turn of this century. If it had *always held its value* it would have been trading at around $1,775 in the year 2000. In reality it hit a low of around $252.

    Gold may well hold its value over the very long term (as I say above I’d be happy to bet it’ll be higher in 50 years) but for decades at a time it can go down and stay down.

    Still, I have no argument with some allocation of gold in a portfolio. 🙂 As I say in my piece, I aspire to build to 2-5% eventually. But mainly just because it’s a clear diversifier.

  • 21 emanon August 28, 2013, 7:47 am

    I currently buy gold with bullionvault but it is not wrapped in an ISA, it’s not great having one asset in a different location with different rules…. does anyone have thoughts on what is the best way to buy gold otherwise that is safe and will give me physical ownership??

  • 22 The Investor August 28, 2013, 1:10 pm

    BullionVault has a London vault, so not sure what you mean about location. There’s always a cost to storing physical gold securely so you either pay someone like BV or do it yourself with a safety deposit box and coins at your bank. There’s a big bid/offer spread on latter though so you’ll need to be prepared to hold for many years to be worthwhile.

  • 23 emanon August 28, 2013, 1:32 pm

    Why I mean by location is from an admin sense. i.e. having certain assets/investments in an ISA portfolio with TD then another part of what it is the same portfolio (and the same asset allocation) in bullionvault which is not wrapped in an ISA. It hurts my brain when trying to manage things that are spread in different locations

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