Root, toot, toot – the price of gold is up there retesting its old highs.
We’ve waited a long time for this moment, though we knew it was coming, and now it’s come, it’s come for all the wrong reasons.
Never has the old maxim been more appropriate: “Put 10% of your net worth into gold, and hope it doesn’t go up.”
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Let’s consider what happens next.
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The price of gold could have topped out here – it’s not impossible
According to my feed, $2,075 an ounce was the old high for gold, printed in August 2020. We touched $2,070 yesterday.
I suppose there are three scenarios we are currently looking at; you get these at pivotal price levels such as we are seeing now, especially around all-time highs.
First, there is the possibility that we are forming the mother of all double tops. Perhaps Vladimir Putin holds up his hands later this afternoon, says “mea culpa”, withdraws his forces from Ukraine and both the war and the currency wars come to an end.
The West, meanwhile, raises interest rates to a level that reflects the new inflationary reality around us. Governments tighten their belts; the blob sheds its blubber and re-emerges as a lean, fit, fighting machine; and fiscal rectitude returns.
OK – none of that is going to happen. But we could still do a double top, and until we go above the old highs and stay there, the double-top scenario is in play.
Scenario two is the old “from false moves come fast moves in the opposite direction” – a surprisingly common and tricky situation. The price moves above the old high, it looks like we have a breakout and then wallop, it turns around and sells off.
We saw one example of such a pattern in bitcoin last year. It went to $65k in April, sold off, six or seven months later it went back to that level, went above it, hit $69k and then, wallop, bitcoin had one of its monster 50%-plus corrections.
So many years of false promise and disappointment with gold have perhaps turned me into a cynic, but I have to admit this is a possibility. Gold breaks above $2,075 to somewhere into the $2,100s – and then we get the correction.
We are in a situation where the price of pretty much every metal is flying. Parabolic moves are fun while they last, but they do not last forever, and at some point the parabola is going to reverse and get ugly.
I’m so caught up in the mania, I can’t see what is going to trigger such a reversal. But often the trigger only becomes visible after the event.
I’m old enough and wise enough to know that bull markets, particularly ones in gold, end.
Alternatively, gold could go to the mid-$2,000s
And then there’s the third scenario – the one, I have to say, that I find most likely: we go higher.
The inflation was coming anyway. Years of money printing had made it inevitable. A decade of underinvestment in metals and energy meant that higher prices were baked in. The war has only accelerated things.
Whether it’s tin, copper, zinc, palladium, silver or gold, they are all going to cost a lot more. That’s not to say they won’t correct –they will –but when the next bear cycle comes they will correct to levels much higher than the previous bear. This is a secular bull market and structurally higher commodities prices will be the result of it.
I remember Charlie Morris of Bytetree arguing a couple of years back that $2,700 was a reasonable target for gold, and those kinds of levels feel right to me.
It’s easy to make any kind of argument to justify a price. Gold is an analogue asset in a digital world; it’s as irrelevant to modern finance as the horse is to modern transport. Gold goes back to $1,250/oz and the only buyers are jewellery manufacturers, Indian wedding guests and the odd crank who hoards krugerrands.
Or…
Gold needs to reach the kind of price where the US can settle its debts with its gold. The US then audits its gold and we discover there is none there. China meanwhile declares that its real gold holdings are in the 30,000 tonne region and uses them to back its new digital yuan with which it plans to replace the US dollar, as the international reserve currency. Then gold goes to $50,000/oz.
Let’s go for something in-between. Gold remains an important strategic asset. We are in a currency war. Too much money has been printed. Russia takes parts of Ukraine, leaves the rest, declares victory, and we get some kind of ceasefire, followed by permanent insurgency in the taken areas, which the West mostly turns a blind eye to because that is the easiest way of avoiding a conflict. Gold goes to $2,500.
So that’s where I think I am with this. Gold goes higher, but it doesn’t go nickel high.
But wise old owls who were around in 1979-1980, as Russia began its disastrous invasion of Afghanistan (rather a lot of parallels to today), and the Iranian hostage crisis was in full flow, will alert you to a fourth scenario – one that I haven’t outlined above: that is that gold goes parabolic.
Back then, the price of gold, over the space of about 14 months, more than quadrupled from $200/oz to $850. The last month saw it go from $400 to $850 in barely 30 trading days.
Such arguments bring targets like $4,000 or $5,000 into play. These are mad markets and mad times, anything can happen. “Prices can go up as well as down”.
I’m not ruling out anything – but I don’t think a target in the mid-$2,000s is unreasonable.
Dominic’s film, Adam Smith: Father of the Fringe, about the unlikely influence of the father of economics on the greatest arts festival in the world is now available to watch on YouTube.
