I’ve been a gold bug for nearly ten years. It’s been good: the dollar price of gold has nearly quadrupled since 2000. It has also been easy. Not many things in the investment world are obvious (to me at least) but in 2000 the fact that gold’s long bear market was really over seemed pretty clear.
After 20-odd years of falling prices, spending on both exploration and production had collapsed, leaving supply static at best. Yet demand was rising as India (a hefty consumer of gold jewellery) got richer and other emerging markets upped their consumption: for some years more gold had been consumed than had been mined on an annual basis with the shortfall only met by central bank sales and loans.
At the same time, the US trade and government deficits were beginning to look even more unmanageably huge than usual and the supply of money was rising fast, suggesting that the dollar was vulnerable – historically, when the dollar falls, the gold price rises.
Finally, most of the people who had worked during the previous bull market in gold, which took it from $35 to over $800 between 1971 and 1980, were either dead or long retired. So, with all the benefits of 20 years of hindsight, the consensus view from the City was that gold was a rubbish investment. Any suggestion that it might not be was met with almost universal derision.
Oddly, it still is. There was a brief period last year when, with the financial crisis at its peak, the nation’s fund managers all turned temporary gold bulls, tripping over each other to quote the phrases the gold bugs had been mantra-ing for years (“gold is no one’s liability”, “you can’t print more gold”, “gold is the ultimate safe haven”, “gold has held its value for 2,000 years” and so on).
It didn’t last very long. Today, even with the gold price once again knocking around the $1,000 mark, the majority of mainstream fund managers aren’t much interested. They say that weak jewellery demand (a symptom of the recession) makes the “fundamentals” of supply and demand look bad; they say that gold isn’t rare or particularly useful; and, most frequently, they say it makes no sense for gold to have a role as a currency in the modern financial world.
So how does the gold bug answer these claims? First, I think we can agree that gold is not rare (look around you – along with some equally ubiquitous diamonds, you’ll see some gold on pretty much every finger in sight). But rare isn’t the point. The balance between demand and supply is the point. And right now supply is limited and demand is high.
Sure, thanks to high prices and what the World Gold Council describes as “a time of severe global economic difficulty”, jewellery demand fell in the second quarter of this year (except for in China, where it rose 6%). But investment demand was up 46% and supply was well below that of the previous quarter as the flood of recycled gold (think panic selling of jewellery) on to the market slowed and as central banks entered the market as buyers rather than (as they usually are) sellers. Between them, they made net purchases of 14 tonnes.
The fact is that right now the gold price has little to do with the demand for bangles and brooches across the world’s shopping malls. Instead, it reflects gold’s monetary role: whether you think it makes sense or not, gold is seen by a large number of people (mostly outside the City) as having a monetary function.
With massive increases in global money supply, quantitative easing suddenly seeming normal, and fiscal stimulus all over the place, there is a huge amount of new money sloshing around the world – by the end of the year the Bank of England will have printed at least £175bn, for example. The inevitable result? Most currencies are being debased in one way or another. So it makes sense to hold one that can’t be. Indeed, as one of the leaders of the long-term gold bugs, Bill Bonner, likes to say, gold is most useful in extreme monetary conditions – when “other money goes bad”.
There is a large and growing school of thought that would have you believe the global economy is recovering, that neither inflation nor deflation is a particular threat and that you no longer need safe haven investments of any kind.
This view might be the right one, but just in case it isn’t – there may be more bank failures and another leg of recession, perhaps even inflationary recession ahead – I’m going to stick with my gold for a while yet.
I might even buy some more. According to Frank Holmes, the US fund manager, the beginning of September has historically been a pretty good time to start building or to top up a gold holding – the price has risen in 16 of the 21 Septembers since 1989.
• This article first appeared in the Financial Times