When journalists start bagging out gold, you know it’s time to think about buying some.
Because they have an uncanny knack of getting gold’s next move 100% wrong.
When they are cheering gold on, you can bet your nugget that the price is topping out. And conversely when they are giving gold a tough time — like now — you can be sure the gold price is bottoming out.
Because let’s face it: if they could make accurate trading calls on gold, they wouldn’t be making their living writing newspapers…
So I was pleased as punch over the Easter weekend to see the Sunday Age lead its finance section with a story called, ‘Has gold had its time in the sun?’
Bring it on. More of that bearishness please!
The writer did, in fairness, include some quality research from our own Greg Canavan of Sound Money Sound Investments.
Then countering Greg’s argument he used some negative views from AMP Capital Investors Chief Economist, Shane Oliver.
To quote the story: ‘[Oliver] says the risk of a global meltdown or collapse has receded and the appetite for gold is less than it was…He cannot see much upside in the gold price from here, though that could change quickly if there is another major financial crisis or inflation spikes.’
Now I’m sure Shane’s a lovely guy, but he’s clearly not very good at gold.
Then again, which institutional economist is? While they may be able to talk about dividend payout ratios, and franking credits until dawn; gold (and gold stocks) make up just 1% of global assets, so doesn’t tend to preoccupy their thinking at 3am on a very regular basis.
The main problem here is Shane’s assuming gold can only rise if the world is going to pot.
Some Urban Myths About Gold
This is perhaps the most popular of gold’s urban myths. And I’m happy to say that it’s total nonsense.
Gold actually gained far more in the five ‘go-go’ years prior to the GFC than it has gained in the five crisis-riddled years since.
For example, between the start of 2003 and end of 2007, the average global GDP rate was a chunky 4.78%.
No ‘global meltdown or collapse’. And in this period gold gained a respectable 149%.
From the start of 2008 to the end of 2012, the global economy has been an ever-evolving ‘global meltdown’. The average global GDP rate has been just 2.86%, mostly thanks to China.
And gold gained less in this period — with a 95% rise.
So contrary to Oliver’s argument, gold can do just as well or even better during the good times than the bad.
The misconception is so common, I even hear it from smart analysts saying things like this: ‘I’d love to see gold at $2000, but I’d hate to live in a world that creates such a high price.’
So I ask them if a five-fold rise in the gold price since 2002 has translated into a world that’s five times worse (discounting the rise over that period of reality TV, drivers who text, and of course Justin Bieber).
The fact is that the state of the global economy is not a direct driver of the gold price.
Other factors, for example global money supply growth, are far more important.
And here’s the other two biggest of these golden fairy tales.
Firstly: that rising interest rates will stop gold from rising.
The idea is that investors will sell their gold when bonds start paying more yield. For example, if the US ten year bond starts paying 3–4% again, then gold will lose its appeal.
There may be a few gold owners that think that way, but they are in a tiny minority. But the real issue here is that history disagrees with the argument.
From 2003 to 2008, yields on a ten year US bond were around that 4% mark. And factoring in inflation, the real yield was around the 2% mark most of this time.
Did that slow the gold price down? Not exactly. It gained 149%.
Yields have a Long Way to Go Before They Stand a Chance of Denting Gold
So it has been amusing to hear people argue gold was going to fall because rates were creeping back up again. Because gold soared despite five years of real rates as high as 2%.
With today’s rates in negative territory, I’d say gold owners are pretty safe from this particular bogey-man.
The third bogey-man is the theory that mass sales from ETF’s could kill the gold price.
Back in February, the media was frothing at the bit that gold would crash because investors had liquidated 100 tonnes of gold (from a total of 2500) from ETFs during the month.
But let’s step back and put that in context.
Last year China imported 834 tonnes, with 114 tonnes in December alone.
India imported 860 tonnes in 2012, with another 100 in January.
As a whole, central banks purchased 534 tonnes in 2012.
These three buyers alone account for 2228 tonnes between them in 2012. In other words, they bought 100 tonnes every 16 days.
So I wouldn’t sweat it that ETF’s sold 100 tonnes in February. It wouldn’t even touch the sides of Asian demand.
In fact, global gold ETF holders could dump their entire remaining position of 2400 tonnes, and it still wouldn’t be enough to feed China, India and the central banks for thirteen months.
The Real Driver Behind Gold
Gold is an Asian story now. Western investors, and famous traders and hedge fund managers for that matter, need to wake up and smell the coffee if they still think that their trading is relevant to the big picture for gold.
I wrote to you yesterday with the transcript from my recent conversation with Eric Sprott about gold. I asked what he thought about the People’s Bank of China suggesting that they hadn’t increased their holding over the last three years, from 1,054 tons. Eric said:
‘I don’t believe that for a second. It seems so obvious to me. They haven’t been buying US treasury bills or treasury bonds for the last 18 months. I think it doesn’t take a rocket scientist to realise that owning gold is probably the best thing you can do these days as a central bank.’
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It was a good chat we had. And if you haven’t seen it yet, I’d recommend a quick read, as Eric made some very interesting observations.
That’s the thing. Just as you should be selective about the food you consume, you should be careful about the ideas you consume.
It’s your choice. Will those ideas come from a fund manager that runs $11 billion in the precious metals space — or will you prefer to gobble up a journalist’s musings instead?
Dr Alex Cowie
Editor, Diggers & Drillers
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