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"Whether through exuberant hedgies or anxious
private investors, gold just keeps pushing higher..."
SO SPECULATIVE BETTING on gold going higher now equals a record-busting 752-tonne position
in Comex futures and options, yet this is not a bubble according to Michael
Pento of Deltaga.
Let's say otherwise. Let's say that gold prices, surging by almost $100-per-ounce
in barely a month, are very much in a bubble...blown up by near-zero interest
rates worldwide and a sharply negative cost of borrowing after inflation. Were
that the case, the question before potential and existing investors would be simple:
Is this "irrational exuberance" or a "permanently high
plateau"?
Alan Greenspan applied the former to US price/earnings in Dec. 1996; Irving
Fisher said the latter of US equities in Oct. 1929. Both were looking at what
history would decide were clearly bubbles in hindsight. But Greenspan was
three years and 105% early.
Fisher spoke less than 72 hours before the Great Crash began...
Buying gold always looks "irrational" to most financial advisors
and commentators, because it doesn't pay an income or yield.
No matter that gold has beaten all other asset classes bar none since
the start of the decade. People looking to buy gold (the blue line of
Google searches above) have been underwhelmed with content and analysis
online, despite outstripping the volume of "buy stocks" searches
(in red) for nearly five years.
Gold buyers have also averaged 20% gains year-on-year since this point
in 2004. That compares with -0.6% on average from shares, but so what? Check
the spike in "buy stocks" stories highlighted by Google Trends'
lower chart during October last year. Just when gold turned sharply higher
– and stocks still had another 40% to fall – the news-flow
focused on bottom-fishing in equities.
Gold's productive value is
also judged to be nil next to foodstuffs, energy or base metals –
materials that vanish in use and thus display a clear supply/demand dynamic.
Whereas all the gold mined in history, being indestructible, is still with us
today...some 165,000 or so tonnes. That makes a fundamental case for gold
built on tight supply, rising demand absurd. Nor can TV or newspaper
journalists get used to applying "exuberance" to gold, the ultimate
in gloom-and-doom insurance outside your local gun-store.
But while permanent plateaus are harder to find in finance than geology,
gold's peg-legged clambering of the last nine years most certainly puts it
higher than it started.
What's powering the Stannah Stair-Lift today? In a word, leverage.
Liquidity (meaning "leverage", as 2008 proved) has flooded back
into the big investment houses, thanks to tax-funded injections, quantitative
easing, and central-bank asset guarantees.
Near-zero interest rates sure help as well. And that, in turn, has enabled
what we used to call investment banks to revive their prime broking services,
offering to deal whatever leverage-hungry clients want most, and financing
the trade with that ultra-cheap money.
The most leverage-hungry clients, outside of the banks' own
proprietary trading desks, remain hedge funds – hedge funds which doubled
in number from 2003 to end-2007 (Hedge Fund Review), growing their assets under
management from $600bn (Goldman Sachs' estimate) to $2.9 trillion
(HedgeFund.net) before hitting the credit crunch precisely as Bear Stearns
blew up.
Just as the long-run bull market in gold threatened to keel over on this
sudden withdrawal of derivatives leverage, however, the physical appeal of
owning gold – or a near proxy, at least – came into its own.
Physical gold investment surged in the back-half of 2008 and early
2009, rising 150% from July-to-Dec. 2007 before adding two-thirds of that
fresh record between Jan-and-March this year alone. (Data courtesy of the World
Gold Council.) And now that deflation seems to be tipping ever-so-smartly
into inflation – and the surge in ETF, coin and bar demand has eased
off – leverage is back just in time for gold's typical autumn move
higher, a pattern seen 20 years in the last 40 and delivering some 15% gains
on average this decade between Sept. and Feb. even for cautious investors
buying on cash, rather than margin.
Inflation, deflation, who cares? Whether it's exuberant hedgies or
panicked private investors with something to lose, this "bubble" in
gold – if that's what you choose to call it after a decade of beating
everything else, and four years after it broke sharply higher versus all
currencies, not just the Dollar – just keeps expanding.
Sub-zero real rates of interest sure help. Media hype, to date, is missing.
When those two factors reverse, buying gold may well become irrational
– and whatever plateau it's reached might well give way.
Adrian Ash
Head of
Research
Bullionvault.com
Also
by Adrian Ash
City correspondent for The Daily Reckoning in London, Adrian Ash is
head of research at BullionVault.com – giving you direct access to investment
gold, vaulted in Zurich, on $3 spreads and 0.8% dealing fees.
Please Note: This article is
to inform your thinking, not lead it. Only you can decide the best place for
your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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