From Saturday's Globe and Mail
Published Friday, Sep. 24, 2010 7:07PM EDT
Last updated Friday, Sep. 24, 2010 8:32PM EDT
Gold has risen every year since 2000, making it one of the longest bull markets going. For gold fans, that’s a reason to expect more gains ahead. For dispassionate observers, it’s a warning signal.
The reasons to buy gold are many: The mighty U.S. dollar is slumping, investor demand is soaring, and the metal offers an alternative to stocks and other asset classes gyrating amid a shaky economic outlook.
As gold’s investor base grows, its price is setting records. Gold broke through the $1,300 (U.S.) an ounce level for the first time on Friday before settling a shade below. It has surged more than 30 per cent over the past year.
Investors are snapping up gold as a substitute for paper money. Some fear that central banks, such as the U.S. Federal Reserve Board, may resort to printing vast quantities of currency to jump-start their economies, making gold an attractive bet for those worried about the future value of currencies.
Those fears were heightened this week after the Fed said it’s contemplating further quantitative easing, pushing long-term rates even lower than their already low levels, should the U.S. economy remain weak.
For some gold experts, however, the metal’s standout rally has echoes of past runaway investments that ended badly.
“It’s a mania that smells like a bubble,” warns Jon Nadler, a metals analyst at Kitco.com, a Montreal-based precious metals dealer, who has been tracking the ups and downs of the bullion price for 30 years.
Mr. Nadler says one sign is the huge inflow of hedge fund money into gold, often using high leverage. Last month, Bloomberg Businessweek featured one such prominent investor, Thomas Kaplan, as a cover story. For Mr. Nadler, that kind of media attention is a sign the rally is living on borrowed time.
Another worry is that much of the money flowing into bullion has gone to into gold ETFs, making prices vulnerable should those who have bought these actively traded funds bail out. Fickle hedge funds might be tempted to sell if they begin to view competing assets, such as stocks, as more attractive.
Gold has jumped five-fold over the past decade. Still, gold’s fans are not fazed by the price explosion, saying the metal could easily rise for years to come.
Ronald-Peter Stoeferle, an analyst at Erste Group, an Austrian-based bank, watches for signs of speculative frenzy in financial assets by the masses, and doesn’t see it yet for gold. For him, that means the rally still has legs.
“If you just walk around in Vienna and ask 10 people, ‘Could you tell me or recommend me a few gold mining stocks?’ you wouldn’t get too many answers. If you compare that to the [technology] bubble back in ’99 and 2000, you would get about 100 recommendations of hot stocks right now,” he says. “We’re far away from irrational exuberance.”
Martin Murenbeeld, chief economist at DundeeWealth, has a similar take. “One of the signs I would be looking for is that everybody and his dog is screaming to buy gold,” he says. The last bubble for gold ended in 1980 in a wild surge to the equivalent of nearly $2,400 in today’s money, and people were clamouring to buy at bullion counters at major dealers, such as the Bank of Nova Scotia.
“People were lined up around the corner at the Scotiabank” gold wicket back then, Mr. Murenbeeld says. You don’t see that today, he says.
Mr. Murenbeeld is convinced the bull has more room to run, with the price likely to rise past $2,400, its previous high when adjusted for inflation. “I think gold will take that out. I don’t know whether that’s three years from now, five years from now or 10 years.”
A number of technical indicators related to other commodity prices suggest gold isn’t yet overly expensive, according to Mr. Murenbeeld. Its current value is the equivalent of about 15 barrels of oil, close to its historical average. The same goes for its historical relationship to copper.
Another way to price the metal is to look at its value when it was used to back currencies. Under the old U.S. gold standard, it was pegged at $35 an ounce. If a similar ratio of gold held by the U.S. government compared to the country’s money supply applied today, as in the earlygold standard days, Mr. Murenbeeld estimates the metal would have to be valued at $3,100 an ounce. That’s for the narrow money supply measure known as M1, which includes such things as cash and chequing accounts. For M2, a broader measure, gold would have to be valued at an eye popping $7,000 an ounce.
Much of the ardour for bullion is from gold bugs, who have a fanatical faith in the metal because they think financial Armageddon is around the corner. sting alongside such irrational players is also a potential risk.
“There is a quasi religious component to gold-bugism that says it can never absolutely fail to shine and it’s a total panacea for everything that might ail your portfolio,” observes Mr. Nadler.
From The Globe and Mail published on September 24, 2010
