Monday, August 15th, 2011
When gold becomes a BBQ stopper topic
Gold last week put in what looks like a climactic top — a series of huge up days after a previous strong run up.
Is it the top? I have no idea.
What concerned me though is that everyone at barbeque I was at on the weekend was talking gold. In Australia we refer to hot topics as “BBQ stoppers”.
My brother told me a story of a hospitality worker last week who was helping run a function for bankers. Unlike most waiters, this guy took an interest in what the bankers were talking about. My brother then asked him what investment advice he had after listening to the bankers. “Buy gold,” he said.
Someone else at the barbie told me to buy told. I said to short it.
As William Bernstein, a US investor and author of the classic The Four Pillars of Investing, told me last year: “When housewives are holding gold parties, and your friends and relatives, who otherwise know nothing about finance, have all become gold bugs, we may not be far from the top.”
That said, gold bugs have had a compelling fundamental argument. Last year I wrote a piece on Gold, that wasn’t published, for another publication. It helped explain why gold was going up so much. The question now is whether the price gains have totally blown away the rationale for high gold prices.
Here’s the article:
Gold comes in and out of investment fashion. After falling for a decade, it bottomed at $US250 an ounce in 2001 when the UK (among others) was flogging its gold reserves. The low point is called ‘Brown’s bottom’, an unflattering reference to then UK Chancellor of the Exchequer, Gordon Brown. Since then it has stormed back to the recent highs, with the rally initially triggered by post-9/11 geopolitical risk worries.
Long term, investing in gold earns you nothing – the long-term real return is zero! But despite that, the commodity attracts cult-like adherents called ‘gold bugs’. They’re usually ‘perma bears’ – investors who always believe doom is near, and therefore always own gold.
Gold bugs are often dismissed as nutters. The problem is these oddballs now have the backing of serious money. Billionaire hedge fund trader George Soros, for example –
despite believing gold is a bubble – has 10 per cent of his portfolio in gold. His one-time partner Jim Rogers, who seems to have an uncanny ability to pick market direction, remains bullish on gold, as does another hard-bitten Wall Street veteran Victor Sperandeo.
Gold bugs also have a pretty compelling story to tell at the moment, which they’d proudly note is driving prices up. They say that, apart from the possibility of European defaults (Ireland, Greece, Italy, etc), they’re most worried about future hyperinflation (rampant out-of-control inflation).
Their theory is that government debts, particularly in the US, are so big that the governments will have no choice but to print money to fund them. Gold bugs say quantitative easing (pumping money into the economy by buying assets such as government bonds to stimulate growth), a central bank strategy being used by the likes of the US, is a fancy term for ‘we’re printing money’; and more money means inflation.
Their nightmare scenario for the US is a shock downgrade to growth forecasts causing investors to shun US government bonds. The weak Government won’t cut spending on the likes of Medicare and Medicade, and will have to keep paying interest on its bonds, so it will print even more money to fund debts. That will, the gold bugs say, trigger hyperinflation and creating economic chaos and huge wealth destruction.
Why do shrewd investors flock to gold when governments print money? It’s because there isn’t much around. As a gold investor recently pointed out to me, the net total of gold ever found is about 160,000 to 170,000 tonnes. That would fit in a 22-metre cubed block (a tennis court is 24 metres long). Gold production has also grown at around 1.5 per cent each year.
The amount of gold is relatively stable, but the amount of money surges. So in a relative sense gold becomes worth more. As an analogy, it’s as if an artist produced two paintings. They then mass produced one of them. The value of the mass produced painting (money) would slump relative to the other one (gold).
But there are a few cracks in the gold bug case at the moment. Firstly, apart from Australia, as economic growth remains sluggish the main short-term concern around the world is not inflation, but deflation – falling prices. The Fed and other central Banks want more money in the economy to boost liquidity and hopefully stimulate growth. They also want to devalue their currencies to make their exports cheaper.
Gold mining shares are also lagging gold prices. Why is that? Equities markets are forward looking. Is that an indication the stock market thinks this gold rally is just a ‘flash in the pan’ and won’t last?
What to do? Do you panic about hyperinflation and run out and buy massive amounts of gold to try and make big bucks? Probably not. The key with gold is to use it as a hedge; a hedge against chaos and inflation.
A sensible investor concerned about inflation (there are many who believe gold is not a good inflation hedge) wouldn’t be looking to ‘fill their boots’ as English stockbrokers cry when they’re buying big. After significant corrections, they might be looking to increase their portfolio exposure from, say, nothing to 1–to-2.5 per cent, or 2.5 per cent to 4-or-5 per cent, etc. And, no, this not investment advice.
Gold may well be in a bubble, but bubbles can keep running for much longer than anyone thinks. Gold prices may also portend global economic doom, but we don’t know for sure. But there is heightened risk and taking out a little insurance is probably wise.
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September 23rd, 2011 at 1:58 am
[...] gold falling as well, it’s also time to look at the long-term for that asset as well. In a recent post I noted that gold had become a hot topic at BBQs, which is often a sign of a market top. Someone at [...]