In today’s Monday Morning we consider gold in 2016.
It had a great first week. Bullish chatter was starting to be heard. Then it stuttered.
So have we seen the low? Are we in a new bull market?
Here’s my prognosis for the year ahead.
Gold is bi-polar
Since 2013, I’ve been arguing that gold was going to $1,050 an ounce. Towards the end of last year, we finally reached that target. Negative sentiment was high and a trip below $1,000 seemed likely.
Since then, however, the mood has changed, and suddenly gold is starting to look a reasonable bet again. Gold has enjoyed a rally, especially against the backdrop of falling stockmarkets in the first week of 2016, and we bounced to $1,110.
Such is the bi-polar nature of the yellow metal.
Indeed, it’s actually slipping a bit this week – $1,082 was the overnight low.
The question now is: “what next”?
The mood on gold is changing – but we’re not in a bull market yet
I’ve spoken before about the importance of narrative. Every investment needs a good story behind it. The story is what makes an investment credible; the story drives sentiment and, ultimately, it drives price. And vice versa. It is self-reinforcing. A rising price drives sentiment and makes the story look believable.
Between 2001 and 2011 the narratives were manifold.
First, gold was vastly oversold. You could buy an ounce for $250. In the face of a collapsing dotcom bubble, it looked absurdly cheap.
Then we got the rise of the Brics (Brazil, Russia, India and China) and, in particular, the emerging Chinese middle class, their new wealth and their insatiable demand for raw materials, which drove the whole commodities complex higher.
Then we got the whole loose-lending thing, which led to the financial crisis of 2008. After that came the governments’ reaction to 2008, the money-printing and so on. These narratives all drove buyers into gold.
By late 2011, when gold made its high, the post-2008 narrative was fizzling out. The money printing seemed to be working. The financial crisis had been survived. The economy wasn’t in such bad shape. And gold went sideways.
By 2013 stockmarkets were clearly going up. The central bankers had got it right. The world no longer needed gold. The narrative had changed again. And it started to sell off horribly.
Which brings us to today.
Political uncertainty will make gold an attractive bet
For a new bull market to happen, gold needs a new narrative. I’ve spoken about this need before. I think I may, finally, see something starting to take shape on the horizon. I suspect it’s going to be political.
Throughout the world, there is a growing dissatisfaction with politicians – hence the rise of the likes of Donald Trump and Jeremy Corbyn. As much as anything, I think it’s the wealth gap that is making people so angry. The cause of the wealth gap is high asset prices. So the simple answer is to do away with the policies that prop them up. That’s not going to happen.
That growing dissatisfaction is going to meet with the US general election, which could well be a showdown between the establishment figure that is Hillary Clinton and the anti-establishment figure that is Donald Trump. What an awful choice to have to make.
Perhaps more significantly – in terms of ramifications – in Europe, we have Britain’s referendum on whether to stay in the EU or leave. Brexit currently seems to be shading it.
This is going to be a huge, in-your-face election. Just as Scotland has never quite been the same since their referendum, so might the UK after this one – whichever way it goes.
But a vote to leave may well open up the door for other European countries. It could be the beginning of the end for the EU project. That may sound a little too bold, but it’s possible.
The uncertainty is going to create a lot of volatility in both the forex and government bond markets. It may well be that gold will be perceived as a shelter from all that. Particularly, if the yields on government debt start to rise.
Then comes the next story. For all the talk of austerity, governments are still running deficits. Rising yields on government debt will only increase government spending obligations. A stuttering economy or a recession will do the same as the tax take falls. Governments will need to increase their revenues somehow.
This all points to a bigger role for the taxman. With increasing surveillance to clamp down on evaders and avoiders, more taxes coming with every Budget and, in some places, tighter capital controls and the threat of bail-ins, there will be a desire for some refuge from all of this. That points to demand for gold.
Then you have all the growing instability and anger that brought on by the migration crisis, its causes in the Middle East and, not least, increasing terrorism.
These are all currents I see flowing more violently over the next few years. In the face of them all, gold is suddenly not going to look like such a bad bet. Meanwhile those narratives which have been driving gold lower will start to fizzle out.
So I venture that we’re at the stage where the narrative is starting to change. I’m not calling the bottom. It’s possible – indeed likely – that we’ve seen it, or we may have to go into the $900s first. That is where the price trend is pointing. And the fact that gold is so expensive relative to oil concerns me. Hence my rather hedged suggestion in my New Year’s predictions piece last week that we will see gold in the $900s and the $1,200s this year.
But gold’s time is coming again. New gold narratives will soon emerge. And two or three years from now, you might be mighty glad you own some.
The worst of the bear market is over. Of that I remain confident. But it is too early to say we’re in a new bull market.