EDITOR: | September 3rd, 2013 | 1 Comment

What every gold bug needs to know

| September 03, 2013 | 1 Comment

goldbugWe say learn by heart, you say learn by rote. No, it’s not — unlike how you pronounce either/eyther, tomato/tomahto or potato/potahto — a matter of let’s call the whole thing off, as Fred Astaire and Ginger Rogers sang in 1930.

No, finally, we have some brilliant analysis of gold. Something, if you learn it by heart, it will be something with which to beat gold sceptics about the head when they obsess about how gold is heading for the death zone: like Goldman Sachs back in June saying the precious one would be at $1,050/oz by the end of 2014. And for this ray of hope we have to thank some canny fellows at a little boutique advisory in the wealth centre of Liechtenstein.

But we should also note a report out this week from Capital Economics in London. In their regular update on commodity markets, Julian Jessop and his team make the point that the price of gold has been recovering more or less steadily since late June. They say this is partly due to the same mix of economic hopes and Middle East fears that have lifted oil prices, suggesting both are vulnerable if growth disappoints or the Syrian crisis eases. “But strong physical demand from China and India and an extended period of ultra-loose global monetary policy should provide longer-lasting support for the precious metal,” they add. Oil? Not so much.

Meanwhile, Incrementum in Liechtenstein have charted the annual average gold price since 1971, when Richard Nixon closed the gold window (and unleashed inflation as the plague of modern times). In 1971 the average price was $41/oz. Since then, and before 2001, there were two break-out peaks: in 1980 when the average was $604/oz and in 1987 (when the market bust occurred in October) it averaged $446/oz.

There have been two retreats of any size: one hit its low in 1985, the other in 2000. But, as we know, it has been a year-by-year increase since 2001; at this stage, it seems likely that 2013 will be the first decline in 12 years for annual average.So far this year, the average price is $1,471/oz against $1,630 in 2012. But, if history over the past 42 years is any guide, another spurt lies around the corner.

So far, of the modern era, this year’s has been the biggest decline since the turn of the century. So far this year, gold has fallen 33%. We have seen several corrections since 2001 but they have all been short-lived. They were: in 2003 (minus 16%), 2004 (minus 12%), 2006 (minus 23%), 2008 (minus 30%). And here’s what you must remember: each of those saw the gold haters exult, and argue that gold was a busted flush. Yeah, sure.

Here’s something else you might not realise (nor did I until reading the Incrementum study). Even in the mid-1990s, when gold was what seemed to be then on a gentle but inexorable decline to irrelevance, the metal could still show its strength. While the U.S. gold price teetered, the price of the metal in currencies facing crises rose — and rose dramatically. In 1995-1996, when those currencies were under severe siege, it was clear that gold was viewed as a safe harbour. In South Korean won and Mexican pesos, the gold price doubled; in the case of the Russian ruble, it was a three-fold rise and for those paying in the Indonesian rupiah, gold went up five -fold.

Gold even does well in deflation, again if history is any guide. The analysts show the relative performances during the worst cases of deflation in the past 200 years:

1814-1830: Gold + 100%, silver + 89%, yet other commodities fell 50%

1864-1897: Gold + 40%, silver + 27%, other commodities —65%

1929-1933: Gold + 44%, silver —5%, other commodities —31%.

Okay, so gold is a passive asset, is it? Then take a look at these daily trading volumes (in very round totals):

US$/Euro – $1.1 trillion

US Treasuries – $600 billion

US$/Yen – $600 billion

Japanese gov’t bonds – $400 billion

US$/Sterling – $400 billion

Gold – $250 billion

… and, therefore, trading in gold instruments is greater in daily volume than in Euro/Yen, S+P 500 stocks, United Kingdom gilts, German bunds or the Dow Jones (all stocks).

It is only since 2008 that the Fed’s (and other’s) QE has caused the globe’s monetary base to soar. From 1971 until the ’87 crash, the monetary base grew very slowly, picking up a little in the 1990s and early 2000s — and then exploding. But 2008 onwards, it was still relatively a controlled explosion: it was nothing like the implosion of global debt.

These are Incrementum’s figures for total credit market growth (in private “debt owed” terms):

1971 $1.67 trillion

1981 $3.82 trillion

1991 $13.87 trillion

2001 $27.64 trillion

2011 $53.55 trillion

That’s without the government debt — oh, and there is that small matter of $630 trillion in derivatives, quietly ticking away.

So what keeps the gold bug’s as true believers? All the above.




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  • J. Best

    Thanks for this great article Robin! Of late we ‘Gold Bugs’ have had to tolerate a lot instability and even ridicule! Thank you for laying out the facts that support gold as a good long term investment and a hedge against the instability of the dollar.

    September 3, 2013 - 2:17 PM

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