My regular Saturday comment followed by this week’s blog and financial site links.
I can’t decide whether I should feel frightened at no longer having any exposure to gold, or pleased I’m not taking part in a bubble.
Generally I subscribe to the Keynesian view that gold is a ‘barbarous relic’. I sold my holding in Blackrock’s Gold and General fund during the credit crisis to buy more cheap shares.
Like many modern investors I don’t like gold because it’s a near-useless lump of metal that’s only worth what someone will pay for it.
But equally, I can see that’s what gives it special status when diversifying a portfolio. Gold is uniquely useless, and that makes it a potentially pure bet on money supply, compared to say copper or silver which also have industrial uses.
This week saw the gold price fly past $1,100, and the usual justifications trotted out:
- There’s an inflation timebomb ticking away, so buy gold
- Quantitative easing and cheap money threatens the survival of paper currency
- Central banks in Asia are buying more gold
- Supply is diminishing while demand is increasing
- The future is more uncertain — only gold gives certainty
Most of these don’t stand up to scrutiny.
For instance, the inflation-adjusted price of the 1980 gold price peak of $850 is well over $2,000 an ounce in today’s money.
Gold bugs cite this as proof gold is cheap even after a nearly decade long bull market from the sub-$250 lows at the turn of the Century — they ignore the fact it proves gold has been a terrible inflation hedge over 30 years.
I don’t doubt we face an inflation threat, but if inflation does strike then interest rates will rise, too. Gold is currently cheap to hold, despite the fact it doesn’t produce an income, due to very low interest rates. If interest rates rise to say 5% (pretty low historically speaking) then that will be the ‘negative cost of carry’ of holding gold.
In other words, gold will have to rise 5% a year just to make up for the opportunity cost of holding it.
The supply/demand argument is also more complicated than it seems. It’s true demand has increased (prices wouldn’t be rising otherwise) but this is mainly due to the rise of gold ETFs (dubbed ‘The People’s Central Bank’ by some wags).
Demand for jewelry from countries like India actually fell with the recession.
Of course, 5% a year would be a cheap price to pay if paper money and civilisation was really falling down around our ears. But the reality is if that happens, a few nerdy gold bugs aren’t going to inherit the earth with their gold coins stuffed down their pants. They’re going to be robbed.
Gold secured safely in Switzerland might remain yours, assuming the Swiss get through the great collapse with their usual aplomb. But will you be able to reach it? At the end of civilisation you want friends with guns, not something that makes you a target.
Even having such a discussion suggests something mad is afoot — at the least a toppy bull market, maybe a bubble.
The UK Prime Minister Gordon Brown famously signaled the bottom of the gold bear market by selling off the UK’s reserves at around $260 an ounce. Ever the savvy socialist, he even told the market of his plans, further driving down the price.
What might signal the top of the gold bull market? Always a guessing game, but I see Barrick, the Canadian gold mining giant, says we’ve reached ‘peak gold’ in terms of supply. Accordingly, it is making a big bet on future prices rising, says The Telegraph:
Barrick is moving fast to wind down the remaining 3m ounces of its infamous hedge book over the next twelve months, an implicit bet on rising gold prices over time.
Mr Regent said the company had waited too long to ditch the policy, which has made the company enemy number one among ‘gold bug’ enthusiasts. The hedges oblige Barrick to deliver part of its gold into futures contracts set long ago at levels far below today’s spot prices.
The strategy worked well in the falling market of the 1990s, but has cost the company dear in lost profits this decade. “Hindsight is always 20/20,” said Mr Regent, who was appointed from the outside earlier this year.
Barrick bit the bullet in the third quarter, taking a $5.7bn charge against earnings on hedge contracts. Liberation is at last in sight. In 2001 the hedge book topped 20m ounces.
Hindsight is indeed a 20/20 game. I wonder if Barrick winding down its gold price hedge could be a sign we’re approaching the top of the bull market for gold?
From this week’s personal finance blogs
- How to find a job even if you have an ugly resume – Wealth Pilgrim
- How to create a personal finance firewall – Frugal Dad
- Why do people pay more for a top of the line model? – Darwin’s Finance
- Is technical analysis profitable? – Oblivious Investor
- Surround yourself with successful people – ShoeMoney
- Retirement investing advice for late starters – The Digerati Life
- A formal complain to my bank – Five Pence Piece
- “What works for you” can be a trap – Consumerism Commentary
- It’s not how much you pay in costs, it’s the total return that matters – CBS Moneywatch
Other interesting financial and money articles
- Bolton and Woodford on boom versus doom – The Times
- Brazil takes off – The Economist
- Emerging market bonds could offer value – Financial Times
- Savers urged to snap up high-rate offers – Financial Times
- Puzzling lure of bonds – Financial Times
- Oil investing basics – The Motley Fool
- Buy-to-let market recovers – The Telegraph
- Download music for less – The Telegraph
- Your best defense against inflation [I disagree!] – The Independent
- And finally… 50 practical tips to last you half a lifetime – The Times
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