An independent professional's take on the latest news and trends in global financial markets

Quick Thought on Gold

The news this week is  that gold has once again made a new high. It has broken the $1250 an ounce mark for the first time. While I do not count myself as a gold bug, the arguments for owning gold as a store of value and insurance against monetary instability continue to be compelling. I have a significant exposure to physical gold ETFs in my portfolio, having bought in when the price was between $700 and $800, and no intention of selling at these prices.

It may be worth taking a look at the longer term price chart of gold for understanding where we are in the gold cycle. The upturn in gold’s fortunes begain in 2001, not coincidentally around the time that Alan Greenspan, in an attempt to offset the consequences of the Internet bubble and (later) the 9/11 atrocities,  embarked on his disastrous cheap money policy, the consequences of which we are still having to deal with today.

Gold price - standard graph

Gold price - log scale

Gold’s ascent is approaching its tenth anniversary. There is no better way to see what has happened than by looking at both a normal price chart of its performance since the mid 1990s and the same experience on a log scale. What is striking from the log scale chart is that, despite its continued daily volatility, the underlying trend has been for the gold price to increase at an almost uniform pace over the nine-year period. Although it is natural to wonder whether such a consistent uptrend can continue from today’s levels, there is as yet no sign of the acceleration in price which typically marks the final stages of a bull market.

Nor, while gold has become a popular item for discussion in investor circles, is there as yet any sign of a massive move into owning gold by either retail or institutional investors, which is what you would expect to see once a bull market like this one starts to approach maturity. We have certainly not yet seen any populist gold fever of the kind that broke out the last time gold peaked in the early 1980s. Nor amidst the standard conspiracy theories about central bank manipulation of the market that seem to entrance the true gold bug have we seen any convincing evidence 0f that taking place.

What one can say is that a ten-year period of rising prices is exactly the kind of multi-year extended track record that will lead to market promoters setting out to create massive retail demand for an investment. Ten years of rising prices are a marketing man’s dream. There are signs that this may now be about to happen in gold’s case. One straw in the wind of what is to come is the appearance of “Gold To Go” machines that allow ordinary people to buy small pieces of gold  from a dispensing machine in places such as airports. The first one opened in Abu Dubai in May this year and there are plans to extend the franchise across Europe.

Without getting too deeply into the economic factors that may be driving gold higher,  it seems clear that everything that has happened in the gold market so far in the twenty first century is consistent with it being about to enter the third and final effervescent phase of  a bull market, which will end, as all bull markets do, in a period of euphoric excess, followed by collapse.  There are plenty of plausible reasons why investors will want to hold gold for some time yet.  Most bull markets in commodities typically last around 15 years.  This one looks like it will be no different.

Written by Jonathan Davis

September 15, 2010 at 9:39 PM

Posted in Gold, Uncategorized