Gold still a bull market, not a bubble

I went on Radio 4’s Moneybox programme on Saturday to talk about the gold price with the Motley Fool’s David Kuo. David hates gold – he thinks the rising price is representative of a bubble, and he isn’t shy about saying so. You can listen again here. As I love gold, think its rising price represents a rational boom, and am not shy of saying so, I suspect it makes good listening.

However, while I was pleased to get the last word in my chat with Kuo, he is hardly alone in the bubble camp. Bill Emmott is very firmly on his side. In The Times this week he takes issue with the idea that the rise in the price of gold is in any way linked to “a declaration of doubt in the US dollar”, or to the scary failure of the authorities to deal with Europe’s sovereign debt crisis.

To believe that the rise in the price of gold reflects a general disillusionment with paper currencies he says, you have to believe that “governments will stir up inflation deliberately to erode the value of their debts”. Of this, he says, there is “no sign”. In fact the result of the debt problems of the West really going wrong is “far more likely to be deflation than inflation”.

To him that suggests that the real cause of the rise in the gold price comes from the Middle East, China and India. In China and India there is a real concern with inflation, something that has led people to buy gold to protect themselves. However, this is not a trend Emmott sees continuing: in both China and India inflation is not just “economically undesirable but politically dangerous”. So they won’t let it run  riot: instead “one way or another credit growth will be clamped down on and economic expansion is likely to slow”.

Then that excuse for gold will be gone, “leaving it with just one argument in its favour,” the Arab revolts, which have pushed up demand by encouraging people to switch cash into “something less easy to confiscate.” That’s not enough.

The “end of the golden age,” he says, “will soon be with us.” 
I take a lot of Emmott’s points. But boy does he ever have a lot more faith in government than the MoneyWeek staff. No sign of governments inflating on purpose? I give you QE and hugely negative real interest rates. Seems to me that the fact we haven’t yet got double-digit inflation is hardly for want of effort on the part of the authorities.

And China controlling credit growth “one way or another”? Maybe it will, but even Emmott points out that even although the government continually tightens the controls on credit, inflation “keeps creeping upwards.” It is also “stubbornly high” in India despite several interest rate rises. It is never a given that governments can do what they want to do when they want to do it.

Then there is this business of the rise in gold not being linked to the dollar. I don’t buy it. Add in all the liabilities such as Medicare and Medicaid, says Liam Halligan in The Telegraph, and the US is “uniquely in the hole” to the tune of $75,000bn or five times GDP. It is stunning stuff. And while the fiscal problem has now taken some kind of centre stage in political debate, that doesn’t mean it will be resolved.

There is much talk about holding politicians to account. But when did that last happen? The market clearly can’t come up with any examples and that is why it makes sense to think that the debt will end up being inflated away. After all that is what usually happens and the market knows it: I’d say that’s the main reason gold keeps hitting record highs. It is the Middle East that is the side show here.

Finally a word on deflation. Is this a likely outcome of the current debt problems of the West? Sure it is. But any sign of it and you know the printing presses will start working over time. No doubt, as I write Bernanke is poring over the stats trying to come up with an excuse for QE3. Nothing brings on inflation faster than fear of deflation. Under these circumstances it is just too hard to think that gold, long what Halligan calls “ultimate hedge against inflation and dollar debasement”, isn’t still just that. Why else would it have hit an all-time high in the week that the S&P downgraded US debt?
None of this is to say that the gold price isn’t likely to be volatile or that we aren’t closer to the gold bubble bit of this cycle than we were a few years back. Of course we are. Look, for example, at the new offering from Ross Norman at In a couple of weeks you’ll be able to use the site to buy anything from little nuggets of gold to 5kg bars of silver. This kind of thing – bringing an asset to the masses – could be seen as a sign that the last stage of the bull market is about to be entered. But it certainly isn’t yet a sign that it is over.