GOLD is not the bubble that many fear. Its price has risen on the back of fundamentals that have not gone away. Until these threats dissipate, gold will continue to go up.
WAYS AND MEANS
Marcus Grubb of the World Gold Council explains: “Physical ownership can mean holding gold bars and coins, through to 100 per cent physical backed online accounts and physical gold exchange-traded funds (ETF). Mining stocks offer leveraged exposure to the gold price, and there is a wide range of gold futures and options that again bring gold price exposure, but without physical ownership.”
If you are good at picking winners mining stocks might suit. This offers massive upside potential, but African Barrick Gold’s drop yesterday – following Tanzania’s hint that they might bring in a “super profit tax” on minerals – demonstrates the risks. Funds that invest in a number of mining companies can help mitigate this risk, though. Axel Lomholt of iShares argues that a physically backed exchange-traded commodity (ETC) “provides direct exposure to the daily price movements of gold with one of the highest levels of liquidity and transparency.” For those with a longer-term outlook, owning physical gold is the best option, either on your property if you have adequate security, or through a company like BullionVault that allocates it on your behalf.
Mick Gilligan of Killik & Co notes: “Since bottoming out at around $250/oz in 1999-2001, the price of gold has increased more than five-fold to $1,390/oz.” This rise is why many are calling the current price of gold a bubble. However, Gilligan suggests that “adjusted for inflation and against other assets, the gold price remains well below its 1980 peak.” As such, he recommends “investors have an allocation of gold in their investment portfolios.”
Carl Astorri, global head of economics and asset strategy at Coutts, explains: “Using the 1970s gold-market bubble and the 1990s tech equity bubble as templates suggests that gold has not yet broken away from fundamentals and become a bubble. The combination of secular trends, historic investor behaviour, incremental demand drivers from emerging markets, the move away from the US dollar and demand for a hedge against fiat currency weakness would all support further gains for gold.”
Daniel Fisher, CEO of Physical Gold, thinks that over the next three to five years the main drivers of a rising gold price will come from terror threats, further political unrest in north Africa, spiralling national debt in Europe and the limited supply of gold. Adrian Ash of BullionVault argues that current sentiment would only move into irrational exuberance if it kept rising after monetary policy switched from weak to strong. Ash adds: “There’s no fear of rates rising above inflation any time soon, neither in the UK or US. The long-term move into gold may have barely begun.”
TOIL AND TROUBLE
For those predicting another crash, the fissures that could turn into cracks are visible for all to see. The Eurozone and US debt crises remain unresolved. Both could head the way of the Japanese monetary experiment, which itself will likely jolt out of its deflationary slumber with unmanageable inflation, possibly of the hyper variety. Even China, that great hope for the penurious developed nations, might be busy inflating an almighty bubble. In Dylan Grice’s latest Popular Delusions note, he suggests that China’s economy is being both stoked up and suppressed. Grice concludes: “While we can’t predict where complex systems will go, we know that the longer their volatility is artificially suppressed, the more emphatic will be its release when it does come.” It might be that all these economies muddle through, but if they don’t, gold at $1,500 will look like a bargain.
CONTRARIANS AND CENTRAL BANKERS
Ironically, despite the column inches devoted to the subject, most individuals and institutional investors remain reluctant to buy gold. Perhaps they think that they have missed their chance. Virtually all US pension funds still hold less than 0.3 per cent of assets in gold and central banks in emerging markets are still massively underweight gold. But now the central bankers are buying. And so, the world’s most sober people are joining the contrarians, crackpots and historians of booms and busts, who were busy buying gold over the last decade. In the future, gold might become a bubble, but for those that have no exposure to it, it is not too late to buy.