Saturday 1 October 2011
Good reasons to be positive about gold – and to worry about the world.
Gold is an inherently odd thing in which to invest. Hartley Withers, an author favoured by the gold-is-the-only-true-money crowd, told an audience at top-drawer UK think-tank Chatham House in 1934 that the desire for it is: “a survival of primitive barbarism, and dates from a time when the appeal of this nice bright metal to human vanity made it in universal demand for the adornment of the chief ... his wife, the temples of the gods and so on”.
Today such sentiments are echoed by Warren Buffett, the billionaire American investor who frequently points out the insanity of digging up, refining and shipping the metal across the world, and burying it again in expensive vaults.
Withers is loved by gold bugs because he went on to argue that, since its value is founded on “human stupidity”, it is “as impregnably founded as anything you can conceive”. He believed – as an increasing number of politicians on the right of the US Republican party do today – that gold was the best way to guarantee the value of money.
For modern investors, gold is simply an alternative to paper money. So long as everyone else believes it has value, it has value. At the moment, alternatives to paper money – known in the jargon as “fiat” money, given value by government edict – are in demand.
The build-up in the gold price in the past few years, and particularly the rapid run-up before the late summer plunge, reflected a loss of faith that governments would keep control of their printing presses. The more it appears they will debase their currencies through policies such as QE, the more investors seek an alternative.
Gold has been one destination; certain currencies another: the Swiss franc and the yen have soared in the past year, hitting Swiss and Japanese exporters hard. Gold dragged silver (which costs only about $30 an ounce) up with it – though, as silver’s industrial uses mean its price reflects the strength of the world economy, it is not as good an alternative to money.
“The long-term reasons why you have gold in the portfolio – that things might go to hell in a hand basket – are still in place,” says Jonathan Bell of Stanhope Capital, which manages money for several wealthy families. Stanhope places 5-6 per cent of investments into gold, to act as insurance.
After months of grim economic and political news in Europe and the US, there have been a few brighter notes that might dampen the short-term need for an alternative to the euro or the dollar. German politicians overwhelmingly backed the eurozone rescue fund’s expansion, while US economic data were revised upwards, suggesting output and the jobs market are not as weak as thought. Before that, the US Federal Reserve rejected a fresh round of potentially inflationary QE in favour of trying to push down long-term interest rates.
None of these addressed the long-term fear that the eurozone could fall apart or the western world use large-scale printing of money to solve its debt problems. Fixing these threats would remove much of the attraction of gold, but positive predictions are few and far between. One London hedge fund manager has just rented himself space in a bank vault to store gold coins as an insurance policy to protect his wealth. “It is for the one in a 1,000 – or one in 100 now – chance that the wheels come off,” he says.
Investors in gold also rely heavily on so-called technical analysts, the chartists who pore over graphs to predict prices. Early in the summer, for example, a “double top” pattern in the price chart suggested, correctly, the metal would soon fall. More positively, on Monday it reached bottom when it hit its 200-day moving average, a bullish signal suggesting the long-term upward trend remains.
So if the past week is merely an interruption in gold’s long bull run, will it quickly return to its previous highs? The rest of the week’s price moves suggest it might not take too long. From its low on Monday, gold recovered 6 per cent to $1,629 by late Friday. This was partly thanks to advantages offered by tumbling prices: investors with spare cash were able to get in to the market more cheaply – and they took full advantage, buying coins and bars.
Dallas-based Dillon Gage Metals, one of the biggest US bullion dealers, sold off some of its most popular coins, including silver Eagles from the US mint, and both the silver and gold Maple Leaf from the Canadian mint.
Terry Hanlon, president of the company, says records for sales of gold and silver coins and bars of investment size were set last Thursday, Friday and Monday. “Funds and speculators were selling because they were taking such losses in the stock market, and investors reacted to this huge drop [in the price] in a very positive way by buying in,” he said.
The pattern was mirrored across the world. The Shanghai Gold Exchange recorded the highest trading volumes since January, and UBS reports heavy buying across Asia. “Physical demand right now is not just decent, it is exceptionally strong,” wrote Edel Tully, a strategist at the bank.
The appearance of bargain hunters on this scale shows how few believe in a rout. But it does not guarantee a rapid reversal of the fall.
Indeed, after the only other peak-to-trough drops of 20 per cent since the bull market started in 2002, there were further falls. In 2006 gold fell by a quarter; while in 2008, after several false recoveries, it lost a third of its value. Both times, it took about 18 months to return to its previous top.
Withers is loved by gold bugs because he went on to argue that, since its value is founded on “human stupidity”, it is “as impregnably founded as anything you can conceive”. He believed – as an increasing number of politicians on the right of the US Republican party do today – that gold was the best way to guarantee the value of money.
For modern investors, gold is simply an alternative to paper money. So long as everyone else believes it has value, it has value. At the moment, alternatives to paper money – known in the jargon as “fiat” money, given value by government edict – are in demand.
The build-up in the gold price in the past few years, and particularly the rapid run-up before the late summer plunge, reflected a loss of faith that governments would keep control of their printing presses. The more it appears they will debase their currencies through policies such as QE, the more investors seek an alternative.
Gold has been one destination; certain currencies another: the Swiss franc and the yen have soared in the past year, hitting Swiss and Japanese exporters hard. Gold dragged silver (which costs only about $30 an ounce) up with it – though, as silver’s industrial uses mean its price reflects the strength of the world economy, it is not as good an alternative to money.
“The long-term reasons why you have gold in the portfolio – that things might go to hell in a hand basket – are still in place,” says Jonathan Bell of Stanhope Capital, which manages money for several wealthy families. Stanhope places 5-6 per cent of investments into gold, to act as insurance.
After months of grim economic and political news in Europe and the US, there have been a few brighter notes that might dampen the short-term need for an alternative to the euro or the dollar. German politicians overwhelmingly backed the eurozone rescue fund’s expansion, while US economic data were revised upwards, suggesting output and the jobs market are not as weak as thought. Before that, the US Federal Reserve rejected a fresh round of potentially inflationary QE in favour of trying to push down long-term interest rates.
None of these addressed the long-term fear that the eurozone could fall apart or the western world use large-scale printing of money to solve its debt problems. Fixing these threats would remove much of the attraction of gold, but positive predictions are few and far between. One London hedge fund manager has just rented himself space in a bank vault to store gold coins as an insurance policy to protect his wealth. “It is for the one in a 1,000 – or one in 100 now – chance that the wheels come off,” he says.
Investors in gold also rely heavily on so-called technical analysts, the chartists who pore over graphs to predict prices. Early in the summer, for example, a “double top” pattern in the price chart suggested, correctly, the metal would soon fall. More positively, on Monday it reached bottom when it hit its 200-day moving average, a bullish signal suggesting the long-term upward trend remains.
So if the past week is merely an interruption in gold’s long bull run, will it quickly return to its previous highs? The rest of the week’s price moves suggest it might not take too long. From its low on Monday, gold recovered 6 per cent to $1,629 by late Friday. This was partly thanks to advantages offered by tumbling prices: investors with spare cash were able to get in to the market more cheaply – and they took full advantage, buying coins and bars.
Dallas-based Dillon Gage Metals, one of the biggest US bullion dealers, sold off some of its most popular coins, including silver Eagles from the US mint, and both the silver and gold Maple Leaf from the Canadian mint.
Terry Hanlon, president of the company, says records for sales of gold and silver coins and bars of investment size were set last Thursday, Friday and Monday. “Funds and speculators were selling because they were taking such losses in the stock market, and investors reacted to this huge drop [in the price] in a very positive way by buying in,” he said.
The pattern was mirrored across the world. The Shanghai Gold Exchange recorded the highest trading volumes since January, and UBS reports heavy buying across Asia. “Physical demand right now is not just decent, it is exceptionally strong,” wrote Edel Tully, a strategist at the bank.
The appearance of bargain hunters on this scale shows how few believe in a rout. But it does not guarantee a rapid reversal of the fall.
Indeed, after the only other peak-to-trough drops of 20 per cent since the bull market started in 2002, there were further falls. In 2006 gold fell by a quarter; while in 2008, after several false recoveries, it lost a third of its value. Both times, it took about 18 months to return to its previous top.
