“Put 10% of your portfolio in gold and hope it doesn’t go up,” is the old Wall Street
adage, and never has the advice seemed truer than these past twelve months.
Stocks have been almost unstoppable.The S&P 500 is about 40% higher than it was a year
ago. The FTSE 250 isn’t far off that. Even the FTSE 100 is up - and by nearly 1,000 points
as well.
And yet gold is down over 10%, silver by more. A year ago, gold was north of $2,000. Silver
was testing $30. Today gold is $1,780. Silver is $23. Find me another asset that has fallen
in price with all the printing that is going on – there aren’t many. They say a rising
tide lifts all boats, but gold and silver have both been by-passed. The brutal truth
is this: over the past year precious metals have been outshone by pretty much every other
asset in the world.
But, if you followed the wisdom of the adage, you’ve done well. Your gold was your insurance
premium. Everything else went up. Better that than the other way round. Gold goes up and
everything else falls..
That gold hasn’t been going up means elsewhere is doing just fine. You can argue that the
growth is illusory - it might prove to be - but for now markets aren’t buying it.
Gold’s problem is that, as Charlie Morris of Fleet Street Letter puts it, “the economic
recovery is going too well.”
But we gold speculators want to hear that gold is your insurance. Insurance is boring.
We want gold going to $2,500 and gold stocks trebling and quadrupling. Be careful what
you wish for. Maybe the inflationary reality of that scenario would not be so pleasant.
What even is the point of gold any more,? Now we have bitcoin - digital gold in a digital
age. Gold’s beauty may not have been replicated, but it’s scarcity has and that is what gives
it value. The digital economy is where the growth is. You don’t have to go through
ten years of hell to get a mine producing. You can code
an app and get it to market in a matter of months. Investors get a quicker return, and
so the sector attracts more capital. Gold, meanwhile, plods on. This most analogue of
assets in a digital world.
Last weekend saw the 50th anniversary of President Nixon’s taking the US off the gold standard.
Ironic that it should come as the US bails out of Afghanistan, another of its disastrous
foreign interventions. The US abandoned gold to finance its war in Vietnam.
In August 1971 French President Pompidou sent a battleship to New York to collect its gold
holdings, the British asked the Americans to prepare $3bn worth of Fort Knox gold for
withdrawal and President Richard Nixon told the citizens of the United States in a televised
address that the the United States would no longer honour its promise to redeem dollars
for gold.
When asked about the impact this would have on foreign nations, Nixon’s answer was,
“I don’t give a shit about the lira”. Nixon floated the dollar because he did not
have the gold to pay for the military infrastructure the US had built to drop 4 million tonnes
of explosives on south-east Asia. It was a temporary measure - like Income Tax, Quantitative
Easing and masks, it
For the first time in history the world gold played no part in the monetary system. “What
a tragedy for mankind,” said FED chairman Arthur Burns, when he realised what President
Nixon was doing. He was right. Purists - of which I resolutely am one - will trace so
many of the world’s current problems, from spendthrift governments and their bloated
states to house price inflation and the inequality gap, to that decision.
Gold bugs have always maintained that a return to gold is inevitable. History shows the fiat
money systems inevitably die. An inflationary collapse is all but unavoidable. But here
we are 50 years on and a return to gold hardly seems imminent. The only people talking about
it are odd balls like me. Fiat may be a mess; it’s consequences may be verging on the
despicable, but it is surviving and functioning.
So why do we need gold?
It’s clear that inflation is here. House prices have double digit inflation. A pint
of beer that 18 months ago cost me four pounds now costs me £6.50. Materials costs are through
the roof. School fees are up. Wages are rising. Heck, even the Bank of England admits there
is inflation. And yet gold is down.
A fortnight ago, at 11pm on Sunday night, markets were barely open and thinly traded
(and even out east Japan and Singapore were on holiday) , somebody dumped 100 tonnes of
gold on the market - $4bn dollars worth. Gold miners typically sell $10bn on a given day,
and during normal working hours, not when markets are at their least liquid.
Some reports are that it was a margin call, others that it was somebody trying to mani[ulate
the price lower - who knows? But who wants to take on a market like that? Gold analyst
Ross Norman, CEO of metalsdaily.com, argues that “all things considered gold actually
fared well with such an onslaught.” Ross constantly tops the LBMA’s annual forecasting
competition, so we should heed his advice, and despite the gloom of your author, he is
bullish, though he says “patience is required”.
Ach, patience! Ten years ago gold was $1,920 - higher than it is today. Think of all the
money that’s been printed. There is pretty much no other asset, certain commodities beside,
that is trading below where it was ten years ago. Particularly the asset you buy to hedge
against money printing. You can cite all the arguments you like about fiat money, inflation,
debt, suppressed interest rates, money printing, unsustainable spending, misleading government
statistics. I know them all. I agree with them all. The gold price “should” be going
up. It “should” be two or three time higher. But it isn’t.
Veteran analyst Jim Sinclair used to say that the purpose of gold is to balance the books
of the USA. In 1980, during the Iranian hostage crisis, when gold peaked at the end of ten
years of bull market, it went to $850/oz. The US could have paid down its debts with
its gold.
Today total US debt is closing in on $27trillion. The value of its gold holdings doesn’t even
amount to half a trillion. For gold to go back to its 1980 equivalent you’re looking
at a gold price over 50 times higher. It’s a nice conversation for dinner parties, but
back in the real world it is not going to happen.
One day gold’s day will come. Lord knows when that day will be. It might happen so
quickly there won’t be time to buy. We will wake up and there will be some crisis and
gold will be many times higher - that’s why you need to always have some.
I have spent some considerable time auditing China gold holdings. It is the world’s largest
producer and the world’s largest importer, and I am convinced it dramatically understates
what its actual gold holdings are so as not to throw down any kind of gauntlet to the
United States before it is ready. “We must not shine too brightly,” is the motto.
But we know it has designs on global reserve currency status. We know it is extraordinarily
ambitious and sees itself at the top of the global tree. We also know that it is planning
some kind of central bank digital currency to launch in time for the Winter Olympics
in February 2022 in Beijing. Will gold play a part in that? Possibly, though I doubt it.
A gold-backed yuan would give its currency considerable international credibility, when
China decides it is ready. I have to say I find it odd that a nation as authoritarian
as China would go for gold and all the discipline it imposes on government. But the nature of
empires is that their money is sound when they rise. It’s only when they start falling
apart that they resort to debasement.
Who knows? But perhaps China will be the trigger.
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