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Weekend reading: The new gold rush

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My Saturday musing, followed by the links.

Weird times call for unusual observations. One of the most poignant I’ve read recently was an article in The Telegraph about jobless Americans heading to the Californian hills like their forefathers did 150 years ago:

David was sure things would work out. Then his savings dwindled and his optimism soon followed.

But, when things looked darkest, he found he had an ace up his sleeve, the same ace thousands of people have been pulling out of their sleeves in the past two years as jobs dried up all over California and something approaching panic seeped through every county of the state. David turned to gold prospecting.

He’d panned over the years as a hobby. But with the downturn came an opportunity he had never anticipated. Just as in the recession of the early Eighties, the inflation crisis of the mid-Seventies and even the Great Depression of the Thirties, David noticed that gold had not only retained its worth – it had actually risen in price.

In fact, its value had shot through the roof – tripling to more than $1,000 (£658) an ounce since the start of the recession. Earlier this month, fears of a ‘double-dip’ prompted claims that bullion could hit nearly $1,500 an ounce.

This story brings together two of the many big themes of the great slump – the hideously high level of unemployment in the US (20% by the old measure, some say) and the ever-upwards ascent of the gold price.

I’ve long been in two minds about gold. Collapsing jewelry demand and jokes about turning cats into gold against a backdrop of soaring gold ETF demand and ever-present gold buggery all smells like a bubble.

But then, the economy has been through extraordinary times, and Central Banks are employing extraordinary measures – so there is a rationale underlying the increase in the gold price.

The difficulty is there’s always a rationale for bubbles. The Internet has changed the world, the railroads did open up America, and tulips… okay, I’m not so sure about tulips.

But when is a rationale stretched beyond breaking point? That’s the real judgment.

As for the other part of the story – unemployment – this has remained stubbornly high. I wrote back in February that unemployment is a lagging indicator, but I must admit there’s a point when persistently high unemployment implies high unemployment in the months to come, too.

That said, now’s not the time to blink. An FT blogger linked too below says nobody foresaw Britain’s strong return to growth, and now GDP is flying at 1.1% a quarter. Well, I did. And as I wrote on Stock Tickle this week, the good news keeps coming.

Actually on re-reading that Stock Tickle post, I see it could come across as a bit of a brag. It isn’t really.

My central belief is that short run economic performance is pretty much unpredictable, and so a lot of it is down to luck. You’re better off buying what seems like good value to you and riding out what the economy throws at you.

I do admit to feeling a tad smug that most people were wrong and I was right, but it’s been the other way around plenty of times before (particularly on UK house prices, where I’ve been bearish for nearly a decade).

No, I’m more happy because of what independent thinking could mean for my investing performance in the long run.

Warren Buffett didn’t get rich by flip-flopping his investments with the latest groundlessly negative opinion columns. And neither will we.

Ideally we’ll be greedy when others are fearful. But above all, let’s not be greedy for fear.

From the blogs

From the big boys

  • Partial stress (test) relief – The Economist
  • Blimey that’s strong growth – FT
  • UK dividend payout falls due to BP effect – FT
  • Simple strategies for investing success – FT
  • Homeowners urged to use debt window – FT
  • UK growth reignites austerity debate – Telegraph
  • Equitable compensation to be capped at £266? – Telegraph
  • Invest in soft commodities … – Telegraph
  • …even The Guardian says so – The Guardian
  • Indian bank tops the fixed rate savings tables – The Guardian
  • Why you should diversify globally – The Independent
  • Wealth preservation from the Troy funds – Independent

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{ 9 comments… add one }
  • 1 Money Smarts Blog July 24, 2010, 2:04 pm

    Thanks for the link.

    Interesting story about panning for gold.


  • 2 Craig July 24, 2010, 2:47 pm

    And here’s why the market isn’t a given – it could be that gold’s value is justified; we just can’t know right now. Though it also seems that when everyone seems to talk about something it’s time to get out.

  • 3 George July 24, 2010, 4:41 pm

    Here’s where an American needs the British mortgage market explained… I really don’t understand the advice to pay down the mortgage while rates are still low. Seems like you should wait until mortgage rates actually start rising? Obviously the people refinancing into the lowest fixed mortgages understand this.

  • 4 The Investor July 24, 2010, 6:21 pm

    @George – The trouble is I think that most Brits take a hands-off approach to finances, and don’t invest much outside of their mortgage. For most people of my parents’ generation and circle, the mortgage is by far their biggest investment. The FT article is suggesting you use the ‘windfall’ of lower monthly interest payments to overpay the mortgage because the alternative for most people would be spending it on holidays or new TVs.

    I agree with you, I’d be diverting the savings from rock bottom rates into the stock market while it still looks cheap. (Well, I’d probably fix at today’s low rates first then divert any monthly excess from my original mortgage budget back when rates were 6%+).

  • 5 The Investor July 24, 2010, 6:23 pm

    @Craig – Everyone seems to have been talking about gold for at least a year. I’d never even heard of the ‘permanent portfolio’ (which has 25% in gold) for instance until 2008.

  • 6 Macs July 24, 2010, 8:26 pm

    You do have a way with words…. ‘gold buggery’ made me laugh 🙂

    I don’t personally accept that gold is in a bubble in as much as I think the price has been somewhat justified by various currency crises etc etc. But that said, I stopped buying when it got to ~£600/oz, and now I see it’s rolled back from its peak £850 back to ~£770. I’m sitting on a nice notional profit, but obviously I’d need to sell to realise. And it’s too pretty for that 😉

    I hold my hand up to being bit of a gold bug, but even I was surpised to see the ‘permanent portfolio’ suggestion of 25%. I’m at about 8% just for the security of knowing I have something easily portable if I have to grab my tin hat and run out screaming the day the sky falls. But it’s still a no-regrets asset if the sky kindly stays in place a little longer (which I’m more inclined to believe than I was in 2008).

    Interesting comments regarding mortgage overpayments. In the past two or three years, since I started treating my finances more seriously (with much help from Monevator and other sources 😉 ), I’ve been overpaying my mortgage – or rather I maintained my payments as rates fell. It seemed a no-brainer with the 4% rate vs savings rates of 2-3% in most bank accts, and through the turmoil of that period I focused more on paying down the debt. The way I looked at it, with mortgage rates so low, an overpayment is a way of buying the property equity more cheaply. The end is in sight for me now, I have a life policy maturing soon which leaves me in the clear, so I’m now starting to buy stocks which should yield more than that 4% – but I didn’t want to take on the risk until I was a bit more secure. On the face of it, stock yields vs mortgage rate looks attractive on a %-age vs %-age basis, but the risk element is a significant part of the equation, for me at least. After all, the first rule is ‘Don’t lose money’ so I chose the known, guaranteed return over the potentially higher but unknown risky return. Of course, as the end looms ever closer, I’m getting more open to risk…

  • 7 RetirementInvestingToday July 25, 2010, 8:09 am

    Hi TI

    Firstly thanks for the plug. As I’m sure you know on my blog I regularly track gold in real (ie inflation adjusted) terms in both USD and GBP. As of my last posts in both instances while gold is still well above long run averages and trendlines it also is yet to reach a new high. ‘m not buying though as my allocation is currently slightly above where I need it to be but not high enough to rebalance.

    Incidently I’m also with you on equities now. This month I’ve started buying again given the recent price falls. This has meant that the CAPE has also fallen causing my Tactical Allocation strategy to kick in forcing some buying. Using the CAPE metrics on my blog prices are still above fair value in the US and Aus. The UK though is another matter with prices potentially below fair value. The only nigling thing in the back of my mind here though is that my dataset is quite young.

    Prospecting is actually something I’ve contemplated doing. Only as a hobby though. I’ll still keep the day job though. 🙂 As a person living in the South East of the UK I belive my options though are quite limited. I believe their are some options in Scotland though.
    .-= RetirementInvestingToday on: Government supports the banks ripping off the average saver – NS&ampI Index Linked Savings Certificates suspended =-.

  • 8 George July 26, 2010, 3:58 pm


    You gotta do what will make you sleep best at nights! Perfectly understand your reasoning and, in light of the financial crash of a couple years ago, you absolutely have chosen an excellent path. There’s a considerable difference between speculating where you’re going and knowing where you’re going.

  • 9 Moneyedup July 28, 2010, 3:34 am

    I agree that you are better off buying what you think is good value and then riding out what the economy throws at you. The economy can be unpredictable, so all you can do is trust your gut instincts and hope for the best.
    .-= Moneyedup on: 5 Things You Should Never Say About Money =-.

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