Oh
lordy! Gold investing is being tipped in tabloid
horoscopes...Sell!
"ARE YOU available for an
interview this afternoon? I'd like to discuss the possibility that we're in a
gold bubble!"
So asked a journalist's email we
got here at BullionVault...back on 30th January
2009. Such bubble talk has only grown louder since then.
Yet gold has risen a further 56%.
Which over two and more years is hardly the stuff of bubbles, however you
define them.
Gold investing used to be seen as
a contrarian move, of course – a rejection of the happy-clappy bullishness pervading the late-20th century's
credit-fueled stupidities. So what about mass
participation – that frenzy of Joe Public buying as the mass media
urges him on?
Well, "My esteemed colleague,
the astrologer Christine Skinner, says in her latest financial newsletter that
over the next few months, 'precious metals should hold their value and,
indeed, increase'..." wrote the UK's Jonathan Cainer
this week in mass-market tabloid The
Daily Mail.
Oh lordy!
Gold investing is being tipped in tabloid horoscopes...Sell!
But what's this?
"Generally," Mr.Cainer goes on,
"precious metals rise when international insecurities rise. I too
foresee a bumpy few months on the world markets...but the further into the
future I gaze, the more I like the look of the global economy. For Japan in
particular, the financial outlook is surprisingly rosy."
So here again, gold's bubble finds
its pin all too soon. Christeen Skinner – source of the gold tip –
"has studied space and time for over 40 years," according to her
website, but doesn't currently have a million-strong following. Unlike
Jonathan Cainer, who takes instead what you'd have
to call the contrarian line, if only gold investing really were all the rage
today. Which it's not.
1. It's the wrong shape
Compared with undeniable bubbles, gold's recent climb just isn't steep enough. Gold prices rose 85%
for UK investors in the last 3 years, but US stocks rose 160% in that length
of time in the 1920s, and Germany's Neuer Markt rose over 1600% starting in 1997. The South Sea Bubble in 1720 rose
9-fold in 5 months! What makes gold remarkable today is the longevity, not
speed, of its bull market – now delivering positive, inflation-beating
returns to savers pretty much everywhere worldwide each year since 2000.
2. Investment "mania" still missing
The financial pages might be
packed with gold comment, but actual participation by both professional and
private investors remains low. In the early 1980s, private-bank clients were
expected to hold 3% of their wealth in gold, many times the 0.5% allocation seen in the finance industry today. Even in the bullion market
itself, three-quarters of the 500-plus analysts and traders attending last
autumn's LBMA conference in Berlin said they held as little as nothing ("Between 0% and
10%") of their savings in precious metals. Saturation is a long way off.
3. ...as is true "bubble" psychology
A speculative bubble, by
definition, needs the mass of investors and analysts to ignore its faults
until it's much too late. As late as summer 2007, for instance, and with US
home prices already falling fast, housing was called a "serious national
bubble" by only 29% of professional business economists, up from just 14% two years earlier.In Jan.
2011, in contrast, over half the 1,000 Bloomberg terminal users answering the newswire's quarterly survey called gold a bubble. Just
this week, Barclays Capital's latest institutional
survey found no one – not one!
– who thought gold would be the best
performing commodity in 2011. With prices hitting new all-time highs vs. the
Dollar right alongside, does that sound like bubble behavior
to you?
4. Gold's far from over-valued
All the gold outside central-bank
vaults today (jewelry plus bars and gold coins) is
now priced around £3.7 trillion – barely 3% of the world's total private wealth and far below the 15-30% estimated for the 1930s and early
1980s, the last two global financial crises. It's only just climbed back to
one-fifth of the value of G7 government debt, a level last seen in 1990 and
well below the near-parity of 1980. And on a risk-adjusted basis, calculated
as an actuary would price insurance, fair value for gold could now be nearer
$3800 per ounce than the $1440 being asked in the market. That's because the
market continues to discount to zero the risk of a severe, even hyperinflation,
such as the rich West hasn't seen since WWII. Which could
no doubt prove the correct view, if only it weren't so complacent.
5. Money-crisis insurance still needed
It's always hard to accuse gold
buyers of "over-optimism " (Charles Kindleberger's definition of
bubble mentality), but this market will only switch to "irrational
exuberance" (Robert Shiller's phrase) when
its key driver – loose monetary policy – ceases to be true.
That's what happened as interest rates began rising sharply at the start at
the end of the 1970s. In the early '80s, cash in the bank started to pay
double-digit returns over and above inflation, so inflation defence just
wasn't needed. Whereas today, in contrast, real interest rates in the UK are
worse than at any time since 1978, with our record peace-time deficits
– plus the loose money consensus which continues to dominate both
monetary and fiscal policy – capping any hope savers
might have of earning a decent yield on their cash.
To recap: Nothing has changed
fundamentally. Ultra-loose monetary policy is chipping away at the value of
official cash, only it's now locked in by record peace-time deficits which
have hamstrung central bankers' ability to respond to rising prices. As an
aside, emerging-market demand continues to grow, but mass participation in
the rich West is a very long way off.
Or as GoogleLab's
Ngram widget puts it – searching books
published in English since 1800 – the word "gold" is only
just making a comeback. Gold investing is by no means sure to defend or grow your savings,
it certainly remains far from a bubble.
Adrian Ash
Head of
Research
Bullionvault.com
You can also Receive your first gram of Gold free by opening an
account with Bullion Vault : Click here.
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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