Sunday, August 28, 2011

Is gold still fairly priced?

At the time I first accepted Richard Daughty's argument that gold represented a great buying opportunity, I didn't have the money available. So, seeing the phenomenal rise in the price over the last few years, have I missed the boat?

It depends. Yes, if what I want is the chance to buy in well below trend and "make a killing"; but perhaps not, even now, if I'm merely seeking something that may protect my savings against inflation.

There are so many ways to define inflation, especially if you are a government incentivised to keep the official figure low. But let's take a look at one monetarist measure, the Mises Institute's "True Money Supply", and compare that to the price of gold since 1971 (the year of the "Nixon shock"):

According to the above, gold is just about on its long-term trend line; not a bargain, but that's not the issue here. However, that trend does include the dramatic spike of 1980, from which peak it took some years to climb down. So let's re-do the line from 1985 onwards:

Seen this way, we're a little above average at the moment, which is perhaps why Marc Faber is hoping for a near-term pullback of $100 - $200; but it's not egregiously high, which doubtless explains why he still sees it as his favourite investment.

Another straw in the wind is a comment by an investment banker on a recent blog-piece of mine entitled "Cash: the investment of the century". "Wolfie" says (Aug. 17):

"I'm currently 100% cash but I think the time has come to break cover and take a 30-40% gold holding. A storm gathers."

I certainly have to take seriously an industry insider who is clearly as bearish and cash-based as myself, but wouldn't you know it, I've been in the USA for the last fortnight and unable to do anything about it up till now.

Perhaps it's "a sign" that I was in NY for Tuesday's 'quake and had to fly out of Newark two days early, just ahead of Hurricane Irene. In any case, I'm now considering following Wolfie's suit sometime soon, even though I don't like the price much. For in the mass of unused money in bank holdings lodged with the Federal Reserve, and also with the more fortunate of transnational corporations who have been fleecing the American consumer for decades and blaming the Chinese who get to see only 15% of the action, lies true storm force potential.

I think we have some time yet before the cloud of cash makes landfall - I've been eyeing 2016 as the approximate end of the real underlying recession - but I shan't delay my preparations quite that long. As the ancient Greek saying goes, there is no borrowing a sword in time of war.

INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), and missing all those day-trading opportunities.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.


Stevie b. said...

""Wolfie" says (Aug. 17):

"I'm currently 100% cash but I think the time has come to break cover and take a 30-40% gold holding. A storm gathers."

I certainly have to take seriously an industry insider who is clearly as bearish and cash-based as myself"

Forgive me, but I can not take this guy seriously at all. I mean - seriously - how can anyone be 100% in cash without having hedged that cash? The only real insurance (and I'm not knocking I-L national savings) has always been gold and the only real question is what percentage of liquid assets this should represent. I'd unscientifically guess around 15% minimum, but the greater point is that one should fervently hope that this minor gold "investment" goes to zero value on the assumption that under such circumstances the major investment in cash could be maintaining real value overall.

I suppose if you have no gold you have to start to ease in at these relatively lofty levels and may end up with a less-than-ideal amount if the market does not accommodate you with a pullback.

Sackerson said...

Thank you for your comments, Stevie. I don't know what W was in before now so I can't say, but I think he trades a lot more actively than I do. Let's see how the market humbles us next.

Stevie b. said...

Thanks for your reply. 2 small things

1/ must've been a bit crusty this a.m. cos I realise that in criticising Wolfie i'm implicitly criticising you, and maybe Wolfie is indeed looking at it more as a trade than a hedge, but I still think cash-only has been and remains a dangerous game.

2/ just in case you thought I was pushing myself, I only added the link at the end of my post to give you an idea of my background, not actually realising I was on Blogger to start with (maybe i should go back to bed and get up again)

Sackerson said...

You're still welcome.

James Higham said...

There is the theory of the peak plateau - that it will stay up where it is. Thoughts on that?

Sackerson said...

James, I think you may be right. Gold has been the subject of speculation by the big boys, but even if they're forced to scale back their borrowing the demand for gold may be sustained by increasing panic among ordinary investors looking for some last-ditch defence of value. And a lot of the runup in the price is catchup from an extended period of very significant under-valuation, I think.