Sir John Templeton died on 8 July, aged 95. He was, throughout his life, a great investor. He was also famous for the following quotation: “Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria.”
The late Sir John’s famous quote encapsulates the current condition of the commodity and energy sectors. We have to ask ourselves: Are the bull markets for gold and oil over and are they now primary bear markets?
Firstly, the gold market
Born on pessimism
At the start of the bull market for gold, prices were at a twenty year low of about $250 oz, having been in a bear market since 1980. That particular low became known as ‘Brown’s Bottom’, because Gordon Brown marked it by selling a large percentage of Britain’s gold reserves at the bottom.
Grow on scepticism
We first invested into the gold story in 2001, most people thought we were mad. How’s that for extreme scepticism?
Mature on optimism
As time moved on, holding gold-related investments as a long-term investment became more accepted, particularly as the dollar swooned. The credit expansion also provided fertile ground for its popularity. Gold-related investments prospered and the subsequent credit crisis added further weight. After all, gold is said to be non-correlated with everything, especially stock markets.
Die on euphoria
The euphoria stage is when the price rises higher and faster than ever before. This could mean for gold a doubling of the price in a matter of months. Has there been euphoria? The answer is ‘no’. The majority of investors do not hold gold bullion or gold-related investments as part of their portfolios. You can do your own market research to establish that fact. Talk to people and ask them if they hold gold and you will find the vast majority do not.
Interestingly, the most recent news has been very positive. According to Reuters, the president of Bombay’s Bullion Dealers Association said that in August India imported 100 tonnes of gold bullion, which compared to 22 tonnes in July and 67 tonnes in August 2007. It is the time of year when India’s demand for gold burgeons but the demand this year has been much higher than usual.
We strongly suspect, at present, that prices are being pushed around by short-term speculators to such an extent that gold is now seriously oversold. So we would certainly expect, in the near term, a strong rally, if not a recovery. Our view remains that the bull market for gold is still intact and that euphoria patiently awaits us in the future.
So far, pullbacks have been worse than expected but the gold price is now where, if you believe the story – and we do – you buy gold-related investments. So for the moment it would seem sensible to maintain exposure.
Secondly, the oil market
Born on pessimism
The oil price, at its lows, was $10 a barrel and as recently as December 2001 traded as low as $17.80 a barrel. Oil companies could not afford to invest, the market was very pessimistic.
Grow on scepticism
So far, the market has continually expressed its scepticism about the oil price by never re-rating equities in line with the market price for oil. As we explained in the previous issue, number 578, even now with oil at about $100 per barrel, oil shares reflect a medium to long-term oil price of only $53-$60 per barrel.
Mature on optimism
There has been a measure of optimism about higher future oil prices, quite rightly because it is based on the fundamentals of growing Chindia demand and long term supply issues. Over time, we don’t doubt that growing optimism will manifest itself and the oil price will head meaningfully higher.
Die on euphoria
Still in the future
The energy market is unquestionably suffering on the back of the global economic slowdown and demand destruction. Although the long-term bull market, in our view, remains secure. However, if there is more weakness before support comes in and the $100 per barrel level doesn’t hold (using a thick pencil) we will look to close energy positions. If that happens, we will monitor the situation, expecting in due course to buy back at a lower level.
As far as the gold and energy markets are concerned, we think the following quote from the newsletter The Rude Awakening is apt: “The trick is to know the difference between a bad investment that deserves to fall and a good investment that doesn’t.” We would maintain that our view is correct in believing that this sector falls into the second half of that quote.
• This article was written by John Robson & Andrew Selsby at
Full Circle Asset Management , as published in the 12 September edition of the
threesixty Newsletter .