There might be a little kernel of doubt slipping into your mind about gold by now. I’ve been telling readers to buy it for more than ten years now. That’s worked very well indeed. If you’d piled in back in 2002, you are probably the only person in your street not fussed about whether inflation is two or three percentage points over the Bank of England’s target.
But the last few weeks have sent goldbug heads spinning. First, the price went – as they say in the City – parabolic, hitting new high after new high and peaking at $1,917 an ounce. That led to a rash of articles about gold in the press and Twitter links to charts comparing movements in the gold price to those of the Nasdaq during the dotcom bubble, the Nikkei in the 1980s, and the Chinese stock market in 2007.
Within a matter of days, the gold price started to fall. By Thursday, it was down nearly $200. So is the bull market over? Was it a bubble? And if so should you sell?
First, remember that, whenever anything moves up very fast, as gold has in the last week, it makes sense to a lot of people to take profits. It also makes sense for anyone lending people money to buy gold to be a little more cautious with their rates.
We’ve seen both of these things happen: fund managers have been trimming their positions and the Shanghai Gold Exchange and the Chicago Mercantile Exchange both raised their margin requirements this week. That means they are demanding higher cash deposits from buyers. So, to maintain their positions in gold, investors either had to stump more cash, or sell. Many will have sold and that will have played a part in the sudden price fall.
All in all, you could argue that gold has spent two weeks in a mini bubble and is now crashing. But, if you do, you still have to note that even now – in spite of all the shock on the faces of the goldbugs and the smug glee of the naysayers – the gold price is only back to where it was less than ten days ago.
It could fall a lot further from here – all bull markets twist and turn. PFP Wealth’s Tim Price points out that, whenever the gold price has had hiccups in the past three years, the most reliable support level has been its 200-day moving average. That would take gold back to around $1,500 an ounce, at which point, says Tim, those of us who aren’t holding enough gold at the moment should become “grateful buyers”.
I suspect he is right. I don’t want to be a goldbug forever. What I want is conditions in the global economy and the markets to change, so that I don’t have to be one any more.
What would mark that kind of change? A genuine resolution of the ongoing problems in Europe, for one thing. A sense that politicians in the US were getting a grip on their finances would be another. Let’s not forget that there is a strong historical correlation between the US national debt, its debt ceiling and the gold price.
Then there could be positive real interest rates. Right now, pretty much everywhere you look, interest rates for depositors are lower than inflation. That pushes people into gold, partly because the fact that it pays no interest stops being a deterrent – and partly because negative real interest rates are central bankers’ own special way of telling us that protecting the value of our cash is pretty low down their priority list.
Gold has a long history of protecting wealth from this kind of attitude: its price tends to rise as the credibility of central bankers (and the banks themselves) falls.
Another factor might be a really nasty crash in emerging markets that affects physical demand from the middle classes there (the Chinese in particular).
Finally, some clear evidence that we don’t have to worry about capital controls would help. CSLA’s Russell Napier points to the decision to implement a financial transaction tax in Europe as “the first step in a process of sustaining the unsustainable by taking money from savers. To tax capital successfully, the European governments are now headed down the road to stop its easy movement.” In this new world, “investors will continue to pay up for small, compact and portable forms of wealth” and gold is the best of those there is.
My problem is that none of these things – which would make be happy to dump my gold – are happening. There’s no resolution in Europe, no debt reduction plan in the US and no commitment to positive real interest rates.
This year, exploration companies have staked more than 85,000 claims in the Canada’s Yukon. That’s seven times the number of a normal year, according to the FT this week. If global policymakers don’t get a grip reasonably soon, you’ll be more likely to find me out panning the Klondike myself than selling my gold.
• This article was first published in the Financial Times