Why didn’t anybody tell me before? Had I been aware of a 2012 study by Credit Suisse and the London School of Economics I might have been better prepared for swift evaporation of inflationary pressures currently taking place around the globe. The study investigated the degree to which major asset classes protect against inflation and deflation using data from 19 countries over a 112 year period.
One did not hear too much muttering about ‘psychological levels’ when the gold price fell below 1000-euro level last week. Often, some commentator or other will draw attention to the fact that a market has breached a major round number, but not this time. Perhaps it was the direction of the price move – from above to below – that discouraged them.
This is not the first time that central bank gold reserves have been evoked as a partial solution to public debt problems. In the depths of the Greek crisis, the sale of nation’s bullion reserves was briefly discussed as a means to bring down the debt burden, but the holdings were too small to make any difference. In Cyprus, a proposal to sell the bulk of the island’s gold reserves was endorsed, at least by EU finance ministers. So, it was not shocking to hear about a proposal to put Italy’s ample bullion holdings – the second highest in the EU after Germany’s – to use in tackling its massive debt overhang.
Let me get my disclosure statement out of the way first: I do not own any gold, nor have I done for quite a few months. I confess to being somewhat biased where the precious metal is concerned. Some might accuse me of smugness in regard to the recent sell-off, but this goes too far. In fact, the recent gold crash has left me feeling very troubled. This is largely because none of the experts seem to have any explanation for the extraordinary selling orgy apart from the usual throwaway arguments.
Financial incentives are a powerful force. It can encourage the brightest minds to embark on entrepreneurial ventures, persuade high-school students to further their education, or prompt to pre-grad college students to drop-out. However in the financial services industry, money incentives have repeatedly revealed negative aspects. The bonus culture has come under increasingly negative scrutiny in recent years as it seems to have encouraged bank employees to prioritize their personal gain over that of the firm or that of society in general.
Bild-Zeitung, Germany’s most popular tabloid newspaper ran a front page last year that pictured a hundred gold bars. Within the paper’s colourful pages, readers were offered free tips on how to profit from the ‘limited sources’ of gold. A headline bore the lofty price target of analysts at JPMorgan who, like pundits at the other major banks, predicted a gold price of $2,500 per ounce by the end of 2011. That was last August, at which time the spot price was around $1,800. I remember the moment well because, in the subsequent week, volatility rose sharply. Why? The latecomers had arrived.
Gold mining stocks have a less than a shining reputation among precious metal investors. The expression ‘lame duck’ is appropriate for describing its performance this year. The NYSE Acra Gold BUGS Index (HUI), which includes the stars of the sector, currently stands at the year’s opening price. Perhaps it is for this reason that so many observers seem to relish at the idea of buying in. “Goldmines are unbeatably cheap”, scream the advertising slogans, “hopelessly undervalued”; “cheaper than ever”. Good luck with that one. The reality is that there is hardly any serious precious metal operator who hasn’t, at one time or another, already tried to exploit this apparent undervaluation.
It used to be so easy: one didn’t need to ask whether gold price would go higher, just how high. These days, things are not so straightforward; the $400 price slump in September has muddied the waters a little. But it has not bothered the dyed-in-the-wool gold fans. For them, a 20-odd percent decline is irrelevant for the bull super-cycle, a mere correction, just a flesh wound. Many have held true to their promise to buy even more gold if such an opportunity presented itself.
I saw two seemingly incongruous gold news stories yesterday. The first concerned a massive gold vault in Singapore that is filled to the roof after just one year of operation. It has been besieged by new bullion owners, all ready to pay up to one percent of their holdings each year to keep their metal safe from thieves, earthquakes and plane crashes.
Full disclosure: I have a long-position in gold. Presumably just like many of my compatriots, I keep gold for security – not for speculation – in case something goes horribly wrong in the eurozone or out in the world.
Venezuela wants to call its gold reserves back home. It is certainly exemplary of the President to socialise the profits; nowadays most of the other world leaders are doing the opposite. But is it such a good idea to repatriate all that precious metal?
Money doesn’t buy happiness, but what about gold? At least, this must be the idea of the increasing number of people who have taken to the rivers to pan for gold in in recent months. They can count themselves very lucky if they find a few grains of gold dust. But most of these modern-day prospectors are in it for the fun anyway, even if secretly they hope to stumble across a nugget or two.
Often when I speak on the theme of Behavioural Finance the topic turns to herd behaviour, perhaps because it awakens such vivid and testy notions in people. One automatically envisions a herd of bleating sheep
All financial market information – be it economic, technical, astronomical or astrological – is subject to the psychological needs of the one who perceives, processes and eventually employs it. This was the message I tried to bring across in a recent post and partial response to a Financial Times column. The journalist seemed convinced that investors’ belief in any given method of financial market analysis, however hare-brained, is enough to make the prediction a reality. Even once I pointed out that the human need to keep our beliefs in line with our behaviour takes precedence, he didn’t budge.
A mystery gold-ETF investor caused something of a stir recently when he/she exercised the right to exchange the security for physical gold. For ETF Securities, the issuer of the ETF, this was the first time an investor had paid the fixed fee of £750 (and other unspecified fees) to take advantage of this right.
Gold analysts who want to maintain at least some credibility, i.e., those who see gold prices edging towards $1,500 or $2,000 per troy ounce, are about as rare on the ground as the metal they doggedly cover. The rest have pushed their target prices significantly higher, say to $5,000, $8,000, or even $10,000 in order to get noticed by the media and carve out their stake in the rapidly expanding gold-expert club.