Daily Market Update

Gold Investments Market Update – No “Gold Rush” or “Gold Fever” Despite the International Financial System being Close to Collapse

Gold has rallied strongly again this morning and is up 1.5% at $990/oz after consolidating around the $975/oz mark yesterday. Stock markets are under severe pressure again this morning after yesterday’s 7 year low close for the Dow Jones.

There is a risk here of a panic sell off in stock markets and the next leg down in the stock bear market looks imminent as the ills of the global financial system virulently infect the global economy. While gold has become overbought in the short term, its medium and long term fundamentals are as sound as ever.

Governments and central banks, in their desperate attempts to avert deflation, are debasing their currencies and risk causing an international monetary crisis where investors and savers flee paper assets and currencies into hard, tangible, finite assets that cannot be printed exponentially.

Much mainstream media coverage of gold remains uninformed and lukewarm to negative despite the appalling financial and economic conditions challenging us. This is a sign that gold remains in the early to middle stages of its bull market. Talk of “gold fever” or a “gold rush” in the gold market is very misguided as only a tiny fraction of retail investors have any allocation to gold whatsoever – let alone being overweight gold.

There are no accurate statistics but I would confidently estimate that less than 2% of retail investors have any allocation to gold whatsoever.

The “man in the street” barely knows what the price of gold is in dollars, let alone in sterling or euros. The majority of retail investors (and indeed financial advisors) know little or nothing about why one should invest in gold, nor indeed how one would invest in gold.

Table Above Shows the Slow but Steady Rise of Gold in Recent Years

Gold is featured in the non specialist financial media once in a blue moon (every few months at best) and when it is covered it is nearly always covered in a negative or at least lukewarm fashion.

Factually incorrect statements such as “most analysts warn that gold could be overvalued and there could be a painful correction on the way” are commonplace. The fact is that the majority of analysts are bullish on gold as can be seen in the Reuters Precious Metals Poll and the Bloomberg Gold Survey (both of which we take part in). Most analysts and experts in the precious metal markets remain positive towards gold due to the unprecedented global financial and economic meltdown we are now suffering.

Many of the analysts who are negative are in fact product sellers, stockbrokers and other vested interests who have always been negative on gold and will likely always be so as they simply do not understand and have not bothered to inform themselves about the market.

We will have a gold bubble and a gold mania in the coming years. There is no fever like gold fever. However, we are a long way from there yet and gold will have to reach its inflation adjusted 1980 high of $2,400/oz in 1980 before it can be classed as overvalued. It is currently less than half the value that it was in 1980.

There cannot be a bubble in an asset class unless it rises to all time inflation adjusted highs and often times asset bubbles result in prices of multiples of their previous record highs.

In January 1980, just before the Federal Reserve avoided an inflationary catastrophe, the gold price peaked at $875. That is $2,430 in today’s dollars. But the pools of speculative capital are much larger now than in 1980. A true gold bubble could well leave this benchmark far behind.

And if the dollar collapses (‘Former Bank of England official expects dollar collapse’ http://www.telegraph.co.uk/finance/4125947/Willem-Buiter-warns-of-massive-dollar-collapse.htm) as some fear and the US suffers virulent stagflation or hyperinflation then we will rise way above the 1980 inflation adjusted high.

Gold rose by more than 2,400% (from $35 to $850 or up X 24 times) in the 1970s . Should a similar bubble form now gold would have to rise from a low of $250 in 2000 to over $6,000/oz.

The Nasdaq rose some 1600% from some 300 in 1990 to over 5000 in 2000 ( up X 16 times). Should a similar bubble form now, gold would have to rise from a low of $250 in 2000 to over $4,000/oz.

Even the Dow Jones went from 1900 in late 1987 (after crash) to over 14,000 (up X 7 times). Should a similar bubble form now, gold would have to rise from a low of $250 in 2000 to over $1,750/oz.

To take an even longer term and classic, archetypal example of a bubble, we only need to look to the South Sea Bubble which saw a nearly 10 fold increase in less than a year (a real proper mania) .

Should a similar bubble form now, gold would have to rise from a low of $250 in 2000 to over $2,500/oz (which coincidentally is gold’s inflation adjusted high of 28 years ago).

Gold has no fever, rush or mania yet with little or no retail participation and most of the media covering gold semi annually. More importantly returns have been slow and steady as seen in the performance table above.

Always good to keep a historical perspective especially in these unprecedented and very challenging financial and economic times.

Mark O'Byrne
Executive Director


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