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Scratching Away At Gold - ()
7/12/2009
(119264)
Scratching Away At Gold
Somehow gambling on the gold price has never seemed like fun to me – a market dominated by big players, open to manipulation, at mercy to an extraordinary range of influences, paying no dividends, no interest, worries about safe keeping, a magnet for crooks and con-men, and so on.
Playing chicken has left me with egg on my face over the past couple of years. Gambling on gold has been great, but not for me. The memory of previous booms and busts has been too strong.
Which brings me to a recent report in the American edition of the Wall Street Journal (WSJ) which chimed nicely with my ever-present and often incorrect scepticism. Under a heading which indicated that the gold sceptics had got it right, for at least one day, it appeared at the end of last week, and gave a simple outline of a few of the bearish views. It seemed as if it might be useful to report them – on another day when the gold price has turned a touch easier (as I write it is $1159 oz, down $10 after being off $40).
Up a third to more than $1200 oz this year, it has responded to global economic uncertainty, and more recently to the notion that the Western world will allow currencies to depreciate and will be happy to inflate their way out of debt. That makes sense, but the buying has become so widespread that there is an inevitable worry that gold is becoming another bubble which might burst dramatically and painfully.
The WSJ reported one Omaha manager of a group which has $4bn under management as saying it ‘kind of looks like a buying stampede.’ He has cut gold holdings from 3% to 1% of assets.
Ten days or so ago, Baring Asset Management sold some gold holdings from the Dynamic Asset Allocation fund, and earlier sold most of its shares in gold miners. The proportion of the £1.7bn fund allocated to gold is down from 12.5% to 7% in recent months, suggesting that the story has switched from contrarian to mainstream,. Which makes it vulnerable.
The WSJ quotes a vice governor of the People’s Bank of China as calling gold a bubble last week.
Gold consumption fell 34% in the third quarter of this year by comparison with a year earlier, according to the World Gold Council, with a 30% decline in demand from jewellers, who typically account for about two-thirds of gold buying. Sales of gold bars and coins fell 33% in the same quarter.
The world’s largest gold exchange traded fund, SPDR Gold Shares, added only 3% to its stock of physical gold since the end of September, despite a 16% rise in the price of gold in that period.
Open interest in gold futures, fuelled by cheap money, is up by a quarter over the same period. Should the price really start to fall, that could prompt punters to sell and cut losses, pushing the price down more sharply. Sceptics point out that when the Dubai World crisis broke, gold prices tumbled instead of rising.
Michael Jones, chief investment officer of Riverfront Investment in Virginia, says his firm has sold gold fund holdings and instead bought a mixed gold/silver fund. He estimates gold is 67% overvalued, though it has been 200% overvalued in the past (the report gives no idea of how he computes this). He warns that gold could see a sharp setback at some point, but could rise sharply first.
He is quoted as saying ‘Ultimately, this ends in tears. But it doesn’t have to end anytime soon.’
As the WSJ report points out, gold bulls so far outnumber the bears. They point to the weakening dollar and the threat that government stimulus packages around the world could spark higher inflation. Prominent investors who have bet big on gold include John Paulson of the firm which bears his name, Paul Tudor Jones and Tudor Investment Group, and David Einhorn of Greenlight Capital.
For the moment, the bulls may still be in control, and there is talk of a gold price topping $2,000 oz.
(MW comment from this point) It is easy to summon arguments for a bull case and a bear case. After citing gold as the ultimate refuge in troubled economic times, we saw it go to $900 or so and stick there for many months, disappointing the bulls. Then, as the first signs of economic stability began to appear, the price gathered pace and burst through $1,000, rising just as the worst troubles perhaps began to subside.
In 2010, of course, it could cut either way. Double-dip believers might want to buy gold, while those who see a recovery coming might prefer to invest in equities or a world where rising interest rates hold more attraction – but then they will worry about the need for gold as a hedge against inflation.
As usual, almost every financial/economic argument can be turned on its head, and used to support a positive or a negative argument. Gold? I simply don’t know, but the sceptic in me says you ought at least to be aware of the alternative arguments.
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