“Put 10% of your portfolio in gold and hope it doesn’t go up,” says a Wall Street adage. Never has the advice seemed more apt than during the past 12 months. Stocks have been almost unstoppable. America’s benchmark S&P 500 index is about 40% higher than it was a year ago. The UK mid-cap FTSE 250 has done almost as well. Even the FTSE 100 blue-chip index has jumped – and by nearly 1,000 points.
And yet gold, at around $1,790 an ounce, is down by 15%, and silver by more. A year ago, gold was north of $2,000/oz. Silver was testing $30/oz. Today gold is at $1,790/oz; silver, $23/oz. Find me another asset that has fallen in price with all the quantitative easing, or money printing, that is going on – there aren’t many.
They say a rising tide lifts all boats, but gold and silver have both been bypassed in the broad commodities rally. The brutal truth is this: over the past year precious metals have been outshone by virtually every other asset in the world.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
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. That gold hasn’t been appreciating means all other sectors are doing just fine.
You can argue that the growth is illusory – it might well prove to be – but for now markets aren’t buying it. Gold’s problem, says Charlie Morris of The Fleet Street Letter, is that “the economic recovery is going too well”. But to us gold speculators, insurance is boring. We want gold going to $2,500 and gold stocks trebling and quadrupling. Still, we should be careful what we wish for. The inflationary reality of that scenario may not be so pleasant.
An analogue asset?
Is there even any point in having gold anymore? Now we have bitcoin: digital gold in a digital age. Gold’s beauty may not have been replicated, but its 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 months. Investors get a quicker return and so the sector attracts more capital. Gold, meanwhile, this most analogue of assets in a digital world, plods on.
Last weekend saw the 50th anniversary of President Richard Nixon taking the US off the gold standard. It is ironic that it should occur as the US bails out of Afghanistan, another of its disastrous foreign interventions (see page 8). 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 US to prepare $3bn worth of Fort Knox gold for withdrawal; and President Nixon told the citizens of the United States in a televised address that 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 s**t about the lira”. Nixon floated the greenback because he did not have the gold to pay for the military infrastructure the US had built to drop four million tonnes of explosives on Southeast Asia. Like income tax, quantitative easing and masks, floating the dollar was touted as a temporary measure.
For the first time in history gold played no part in the monetary system. “What a tragedy for mankind,” said US Federal Reserve chairman Arthur Burns. He was right. Purists – of which I am one – will trace so many of the world’s problems, from spendthrift governments and their bloated states to house-price inflation and inequality, 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. Yet here we are 50 years on and a return to gold hardly seems imminent. The only people talking about it are nutters on chat boards. The fiat-currency system may be a mess and its consequences verging on the despicable, but it is surviving and functioning.
Inflation has arrived
It’s clear that inflation is here. House prices are displaying double-digit inflation. A pint of beer that 18 months ago cost me £4 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.
Last week, at 11pm on Sunday night, when markets were particularly thinly traded (Japan and Singapore were on holiday), somebody dumped 100 tonnes of gold on the global market – $4bn 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 manipulate 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 London Bullion Market Association’s annual forecasting competition, so we should heed his advice. Despite the gloom of your author, he is bullish.
“Investors’ confidence has been shaken by the rapid take-down in gold prices, but the market is building a base. Don’t expect runaway prices; this is seasonally a weak period. But, having ground out a bottom, the path of least resistance should be higher. Some will point to burgeoning debt [or] inflationary expectations and question why it’s not much higher.”
“The reality is the market has had to absorb a steady outflow of institutional sales amounting to about 200 tonnes so far this year, coupled with weak demand from India and... China. Retail buying in the form of coins and bars is one of the few positives. I suspect [that this episode] has shaken weaker hands from the market leaving gold to perhaps now surprise to the upside, but as always, patience is required.”
Ah, 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 aside, 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 agree with them all. The gold price “should” be going up. It “should” be two or three times higher. But it isn’t.
To read the whole of this article, subscribe to MoneyWeek magazine
Subscribers can see the whole article in the digital edition available here
Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.
His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on Twitter @dominicfrisby
Zoopla: Asking price discounts hit a five-year high – is now the time to buy a property?
News Zoopla’s October House Price Index shows sellers are accepting discounts of 5.5% on average to secure a sale – we reveal where homeowners are taking the biggest asking price cuts
By Marc Shoffman Published
Equity release rates drop – is it worth unlocking cash from your home?
News Lifetime mortgage rates are falling from their record highs - is equity release worth another look?
By Marc Shoffman Published
The fallout from the war on landlords
Investors fleeing the market and the rise in rents are affecting us all.
By Charlie Ellingworth Published
Eight small-cap trusts to bet on
Funds investing in market minnows are out of favour, but the cycle will turn. Here are the best bets.
By Max King Published
Trust in US TIPS to beat inflation
In an inflationary market TIPS, the US Treasury Inflation-Protected Securities are most compelling says Cris Sholto Heaton.
By Cris Sholto Heaton Published
What is Vix – the fear index?
What is Vix? We explain how the fear index could guide your investment decisions.
By Dr Matthew Partridge Published
Time to invest in the next agricultural revolution
As the global demand for food increases, food producers are seeking to lower their carbon emissions. Technology will help meet both goals.
By Dr Matthew Partridge Published
Asia’s hidden gems: Three undervalued Asian stocks
Personal View Fidelity's Nitin Bajaj highlights three favourite Asian stocks.
By Nitin Bajaj Published
Uber's switch to profitability is an opportunity for investors
The ride-hailing platform has just reported its first operating profit and its future looks bright.
By Stephen Connolly Published
The bond bust bodes well for equities
Rising yields on government debt herald the end of the free-money era and good news for investors.
By Max King Published