Gold: This Time is Different

Asset markets are effectively all the same: housing, shares, commodities, FX, precious metals, pork bellies and interest rates. They are all markets for speculators to trade, investors to get a return of and on their money and sheep to think they can buy and hold (or negative gear) forever.

As I’ve said before, gold in its non-physical form, is no different to those above. Its price is moved in the short term by speculation, just like everything else, and made easier by the proliferation of ETF’s and ETC’s.

To be sure, I’m no Michael Pascoe or other MSM haters who wish to bash gold-bugs over the head, and provide them with a “gold” contrarian indicator to buy back in again. (h/t Bullion Baron)

Vertical lines represent dates of Pascoe's bearish gold articles. From the Bullion Baron

Pascoe has a point though – like the ASX200, gold in AUD has not moved appreciably in the last 12 months, as AUD/USD appreciation negates the robust returns in spot gold in USD. And anyone who bought gold in the dying days of the GFC in AUD is still waiting for their “return”.

At MacroBusiness, we are empirical observers of what is happening, not what should be happening according to models, pet or conspiracy theories. And it is clear that, at the very least, gold is in a exuberant investment phase that is accelerating and two new signs have just appeared that could reinforce this perception.

A Brown Top
Former Prime Minister Gordon Brown infamously sold the majority of the central banks gold reserve whilst Chancellor in 1999, at was then the almost exact bottom in gold’s price. Other central banks performed similar disposals, including one Peter Costello who sold the majority of the RBA’s gold, some 167 tons in 1997 at a paltry $US340 per ounce.

Now there is clear evidence that the central banks are back buying gold – is this a countercyclical Brown top?

From Bloomberg:

In 2010, central banks became net buyers for the first time in two decades, adding 87 metric tons in official-sector purchases by countries including Bolivia, Sri Lanka and Mauritius, according to World Gold Council data. China, with more than $3 trillion in foreign-currency reserves, plans to set up new funds to invest in precious metals, Century Weekly reported this week. Russia purchased 8 tons of gold in the first quarter.
Central banks in emerging markets may aim to hold 2 percent to 8 percent of their foreign-currency reserves in gold, Francisco Blanch, the head of commodities research at Bank of America Merrill Lynch in New York, said in an interview.
Gold is “close to” its cyclical high, said Blanch, who expects the metal to average $1,500 this year.

What may preclude these purchases from being bearish on gold (in USD terms) is most of the buying is by nations who wish to diversify out of the weak and continually debasing USD. This could also be the start of a new monetisation of gold amongst a new reserve currency basket, but this is just speculation.

The Fundamentals no longer apply?
What was the most oft-heard quote during the NASDAQ bubble, as P/E ratios hit triple digits, or were as non-existent as the underlying earnings? This time is different. What was the most heard phrase during the Southern European debt orgy? The EU is different, the fundamentals don’t apply. And as the great Australian housing bubble slowly hisses?

Australia is different

Any careful, rational observation of past hysterias, bubbles and “madness of crowds” shows a 100% failure rate after the words “this time is different” or “paradigm change” are uttered. In gold’s case, there maybe an element of truth, as the “old” fundamentals, i.e. gold’s non-utility as a currency or monetary standard (only 40 years “old” by the way) have a chance of reverting to the ancient fundamentals in a “paradigm” reserve currency move away from the USD.

From MiningWeekly (my emphasis added):

The traditional supply and demand fundamentals that have determined the gold price in previous decades no longer apply, Barrick Gold chairperson and founder Peter Munk asserted on Wednesday.
“Gold today is no longer related to a normal economic cycle of supply and demand, jewellery and Indian wedding seasons…” he said.
“All those things are passe, forget about them.”
Gold is being driven by “a fundamental, global and growing insecurity, a fundamental, global and growing lack of confidence of the world in everything they were brought up to believe in”.
All this means that “gold’s future is assured”, Munk said.

I’ve outlined two possible signs amongst other evidence that derivative gold prices (in USD) maybe further along the “exuberant” phase of a bubble than first thought. Like other asset classes, particularly property, gold has its boisterous supporters ready to confirm their bullish bias and rightly feel indiginant when this evidence is scrutinised rationally. Is it then time to then stand aside, take profits or even contemplate a short of the shiny metal?

Paradoxically, it may be time to explore how to best go long gold, and particularly for holders of AUD. In my next article, I’ll explain my methodology on how to both hedge and trade gold, covering the available products and investment strategies.

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  1. Pascoe’s latest anti-Gold piece in the SMH was anti-Gold as priced in AUD, on April 27.

    The GOLD ETF on the ASX moves according to the AUD Gold price, and it closed April 27 at 135.29.

    It closed yesterday at 137.60.

    Michael’s magic run continues!

    Silver and Gold have shown weakness is recent days, but there is no evidence yet on the charts than the larger degree bull market in Gold priced in USD is finished:

  2. The economies of the US, Europe and the UK are currently exhibiting deterioration at the edges. The proliferation of fiscal debt will continue along with the exorbitant creation of money and credit. They cannot stop because if they do, the system will collapse.

    Furthermore, explosion of derivatives (some say 600 trillion others say 1.4 quadrillion dollars) has created a faux system within a system. Once these derivatives unravel they will create an explosion at the heart of the banking system. It will take out the top five banks in the US and send shockwaves throughout the world’s financial system.

    By studying the history of currencies for the past 6,000 years, gold and silver are the only real currencies to survive whilst all other paper-based systems have failed. We have recently seen a 40-year hiatus of these precious metals, but from a historical perspective, it is the blink of an eye.

    Bankers who are wed to the fractional banking system despise gold as a backing for currencies, because it inhibits their ability to create infinite amounts of money and credit. This over time leads to monetary debasement and the kind of conditions we are witnessing today.

    This is why we have a 5-year + bull market in gold and silver ahead of us, whose presence will be so powerful that governments or central banks will find it hard to regulate, suppress or overwhelm. They may try to stop breakouts from time-to-time by raising margin requirements, but this is only pissing in the wind. Less than 1% of the world’s population currently hold physical gold and silver. The time will come soon when ‘the penny will drop’ and the influx to precious metals will begin – inparticular – from Asian economies.

    So YES, this time it truly is different!

    • unfortunately when those banks blow up the banks, there will be a liquidity crisis. If the banks collapse , people won’t have any cash so there’ll be a collapse in all asset prices, including gold. That’s pretty much sums up the GFC.

      (but don’t worry you can count on the Fed to save the day)

      • Gold is cash. Excepted all over the world, more places than American Express. After the crash you can swap a few oz of gold for a nice water front house in Sydney!

        As far as a bubble in Gold, I would expect a higher participation rate of investors…. than the current 0.06%.

      • Personally, if all goes to hell in a handcart and we end up in a Road Warrior state (which I doubt), having an unencumbered rural block of land off the grid and growing your own food will be a better alternative because you can’t eat gold.

      • The current holdings of gold by investors as opposed to speculators (check out the rise in ETF holdings and trading in futures etc) is not relevant – yet.

        Saying something in a bubble does not equal = “its going to crash tomorrow!” (even though gold did drop almost below $1500 USD overnight because of a small rally back to the greenback)

        As for convertibility: you still need to convert the gold into the sovereign paper currency.. That does not make it cash. It makes it a convertible asset like shares and bonds.

        • Paper currency is a convertible asset, everything is ultimately a medium of exchange. The free markets number one choice over many years has become Gold. Due to legal tender laws governments force people to use its monopoly currency, which it openly acknowledges, targets a annual debasement of 2-3% pa. When confidence is lost in the current fiat system we may well see the return of a commodity based currency, traditionally Gold backed. Government paper may be the biggest bubble of all.

    • @the nod said
      “This is why we have a 5-year + bull market in gold and silver ahead of us, whose presence will be so powerful that governments or central banks will find it hard to regulate, suppress or overwhelm. They may try to stop breakouts from time-to-time by raising margin requirements, but this is only pissing in the wind. Less than 1% of the world’s population currently hold physical gold and silver. The time will come soon when ‘the penny will drop’ and the influx to precious metals will begin – inparticular – from Asian economies”

      Gold and silver are just the fad at the moment. Just like property was for many years its pop all over the world except certain countries which are starting to pop. The problem with the last 25 years is the market focuses on a certain area and creates a unthinkable bubble. Then it pops. If only the market would diversify…….. and the F$%KING govts would stay the hell out of the market. That is the problem with the world the govt feels it has to act and help. What they dont realize is they are making it worst. But guess they have to get re-elected

      • There will come a point where one should consider bailing out. What dynamics would indicate this – I guess it’s high interest rates probably higher than what we saw back in the early 90’s.

  3. Quite topical – BetaShares have launched a AUD hedged gold bullion ETF today…

    I think its important for people to understand what value they’re protecting when using gold in their portfolios. The price of gold in US dollars hedges against inflation and economic uncertainty impacting the value of those US dollars. If that’s what you want to protect against (and with hindsight this is exactly what you’d have wanted to hedge against over the last 2 years), Australian investors should ensure that their currency exposure is hedged at the same time. But perhaps this can be discussed further in your next article Prince…

  4. “evidence that derivative gold prices (in USD) maybe further along the “exuberant” phase of a bubble than first thought.”

    Nice call. It continues to surprise me how many are buying the metals today and think they are still getting in at ‘ground zero’.

    I look forward to the trading article. I’ve seen very little in that space that is relevant for the Australian investor.

  5. In inflation adjusted US dollars it would have to get over $2,500 poz today to be above the high reached in 1980. It has some inflating to do before we are at the top.

    Personally i think it could be at the very start of a bubble phase right now, or it has just entered it. When you look at an inflation adjusted graph the price rises have been steady over the past number of years, not the near vertical shoot upwards it shows late 70’s and 1980.

    Compared to it’s other tops, it’s still much lower measured against the S&P.

    Also countries keep priniting money and spending in responese to any sign of economic weakness, until that stops there is no catalyst to drive the POG downwards.

    It has a ferw years left to go imho.

  6. Thanks Prince. Look forward to the next one.

    You know, i was just reflecting, one shouldn’t have ti=o concern oneself to converting into other forms of money – eg. gold and silver – worry about bubbles and the like, because of prolific money printing, debcassement and inflation.

    It really sucks.

    IMHO, Joe on the corner ought to be able to just hold cash and not worry about these flighty issues.

    What a crappy system!

  7. Unless youre waiting for deflation to buy 1/2 price houses and 50c petrol with your paper cash, how is gold not different this time with debt saturation and no growth. Looks like staghyperflation to me, we’ll need to carry 1000 bucks to go shopping soon 100 buys nothing much.
    Deflation will take the banks out, so a bail out will do what for the AUD?

  8. Nice timing

    I just finished reading a book sanctioned by the US Government and written by Ron Paul and Lewis Lehrman in 1982 called “Case for Gold a minority report for the United State Gold Commission”.

    Say what you may, but Ron Paul knows his history of the US monetary system.

    It’s a bit dry to start, but a very interesting read. What was fascinating is the experiences today in principal, is no different to what happened back in the 1700’s, through to the 20th Century, bailouts included.

    It appears a repetitive pattern, as night follows day, banks and politicians inflate away until “the people” loose faith and trust and the Ponzi scheme once again collapses and its “the people” that go back to gold. The people didn’t trust their bankers or their politicians.

    I think from the US citizen perspective, the trust levels today of politicians wouldn’t be considered high, considering recent events with the demands for proof of death of OBL is anything to go by and don’t even mention the banks and bailouts.

    I always thought people bought gold to insurance their existing wealth, rather than to profit from.

    If history repeats the same pattern, there will be a lot of people trying to squeeze through a small door to obtain gold.