Gold has had a tough start to 2021, but we’ve been here before

Gold has had a disappointing start to the year – in an increasingly digital world, it’s the ultimate analogue asset. Nevertheless, says Dominic Frisby, it remains as relevant as ever. And its bull run isn’t over yet.

Today, we look at gold, which has had rather a disappointing start to 2021. It began the year around the $1,950 an ounce mark, having had a strong finish to 2020. Things were looking up, and a retest of its previous high seemed to be on the cards.

It promptly fell off a cliff and lost $150. Today it sits around $1,850 having crept back up a little over the last couple of days. So what’s next?

Gold miners have been hit even harder than gold

With gold’s weak start to 2021, as is so often the case, the miners have been worse than the metal. Gold miners are now, on average, just under 25% off their August highs – the smaller, more speculative plays, have lost more. That’s official bear market territory (although, with miners, the swings can be so great that the official bear market threshold – falls of 20% equal a bear market – perhaps should not apply).

Nevertheless, the elation of the second and third quarters of 2020 has turned to grinding despondency. We are nowhere near the sentiment lows of 2015 – money is still being raised, exploration is still taking place and a genuine discovery will find some reward in the marketplace. But investors are certainly cursing.

Particularly galling for the investor who has got into gold because of his concerns about money printing, is the fact that the other alternative, apolitical money – bitcoin, or “gold 2.0” as some are now calling it – keeps going higher and higher.

I’d like to console gold bulls with an observation I’ve made several times on these pages over the years. When gold has one of its big runs up, as it did in 2020, going from circa $1,450 in March through to $2,080 in August, it tends to go into these periods of frustrating consolidation that can last a year or more.

Veterans might remember the gold bull market of the 2000s, and super veterans that of the 1970s. They might remember these decade-long bull markets as times of bonanza and elation. But these epic bull markets were all frequently punctuated with extended periods of consolidation and pullback – bear markets even, if you want to use that word – that went on for many months, in some cases years.

I remember one in the ’00s when gold made a high in spring 2006. It then went nowhere for 18 months, and didn’t get above its 2006 high until the winter of 2007. It made another high in early 2008 that it didn’t get through until late 2009. In the 1970s gold didn’t get above its 1974-1975 high until 1978.

So extended periods of consolidation are common features of long-term bull markets. If you’re convinced of the investment case for an asset, often some patience is required until the rest of the market comes round to the same way of thinking as you, and the price starts to go up. Even the apparently immune asset that is bitcoin enjoys extended periods of “consolidation” – “crypto winters”, they are known as. The case for gold – sound money in an age of money printing – remains strong.

Gold – the ultimate analogue asset

What does concern me is this (and it is a subject I have touched on before): the rise of digital technology has seen extraordinary value ascribed to digital assets, whether they be tech stocks or cryptocurrencies. The digital economy has, since the late 1980s, surpassed the physical economy for growth.

Gold is as physical an asset as you can get. Being indestructible, it is in many ways the most physical asset there is: the ultimate analogue. But in a digital age, who cares about analogue assets? This is the age of the digital nomad, the asset-light generation that rents rather than owns.

It’s something that has troubled me for quite a while. It’s all very well saying gold is natural money; that gold has been money for thousands of years. The horse was transport for thousands of years and then along came the car. Is gold as irrelevant to the modern economy as the horse now is to transport?

Something else that I’ve thought about with digital technology is its longevity. You compare all the information you might have on your bookshelf and all the information you have on your computer. How long will your hard drive last for? Which will last longer: the photo on your phone that you never print, or the photo that you do print, and realise in the physical world? So I was quite excited to see an announcement from Canadian-listed company, Goldmoney (TSX: XAU) a few days ago for a new technology in one of its subsidiary companies (which it 55% owns), Totenpass.

Totenpass has been developing “a permanent digital storage drive constructed from solid gold that requires no energy and has no movable parts. Digital data is written onto the drive by way of a proprietary light-diffraction process which imprints images, documents, and other files that can be stored as either human readable without the aid of computers or machine-readable with the employ of a smartphone.

“This technology allows for the permanent storage of precious digital data, thereby eliminating any future dependence on the internet and the vast amounts of energy required presently to store content. By consequence, this technology will empower both individuals and corporations to decentralize, preserve and fully control their precious digital data once and forever.”

Here, it seems, is a very modern application for the extraordinary permanence of gold. I cannot begin to comment on how well the technology works, but it makes intuitive sense to me. Hopefully, it will allay some of my concerns about this very analogue asset.

Bitcoin: The Future of Money? (2014) by Dominic Frisby available in paperback, on Kindle, and in audiobook, at Amazon.

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