Trigger's Festive Tip: Buy Gold

Mon 07 Dec 2015

By

Membership Access | free

Market commentary

Print

There are some things on which you think you can rely. The animals in the nativity scene. The three Kings and their gifts. Gold as a store of value, even insurance. Or can you?

trigger
The nativity scene is an easy one. There is an ox and a donkey. No dog. In fact although my forebears apparently cuddled up with their two legged friends 40,000 years ago, they were nowhere to be seen near THE manger. (Dogs are mentioned quite a few times in the Bible, but usually disparagingly. Cats are never mentioned - apparently the mouser of choice was a house weasel - but I digress.)
 
Ox and donkey?  True? Well not quite, according to a book by Pope Benedict.  "In the gospels there is no mention of animals," he informs us. He says references to the ox and the donkey in other parts of the Bible may have inspired Christians to include them in their nativity scenes. Even the Vatican now includes animals in the nativity scenes it sets up each year in St Peter's Square, and Pope Benedict conceded that the tradition is here to stay. "No nativity scene will give up its ox and donkey," he says.
 
So if you repeat something often enough it is presumed to be correct, and everyone falls into line.  Even the Vatican.
 
Three Kings?  Probably not.  Not kings.  And not even three!  They were probably "distinguished foreigners".  The Gospel of Matthew mentions three gifts, so it has been assumed there were three distinguished guests.  Eastern Christianity does tackle this prickly issue and suggests there were 12 such visitors.
 
But if you repeat something often enough...
 
(As an aside, the lack of detail in the Bible has certainly not prevented colourful narratives being added to a good story line in subsequent centuries.  Some of you might even have been taught the names of the "Three Kings".  One source for these names is a "Greek document from the 8th century, of presumed Irish origin and translated into Latin" - don't let a flaky source distract you from a great fairy tale!)
 
One of the three gifts (and perhaps we can all agree on this?) was gold.  The meaning of each gift at the time, including gold, is still debated.  But what is the story about gold today?
 
Well a couple of articles in the Telegraph in recent weeks had my two legged office friends shifting uncomfortably in their seats.
 
According to one ("Gold remains the best insurance for a crisis") gold is "simply the best insurance against inflation or deflation".  In fact the article tells us six times that gold is "insurance".
 
If you repeat something often enough...
 
And in the second article ("Why I'll never sell  my fund's gold") three accomplished fund managers are wheeled out.  They tell us of "an insurance policy", "faith", and "obvious benefits".
 
Hmmm.  What about the evidence, however inconvenient?
 
Gold peaked in September 2011 at USD 1,921 and is now nearer USD 1,000, more than 40% lower.  Since then the world has been flooded by money-printing by the world’s central banks (with huge inflationary risks), while commodity prices have plummeted reflecting growing deflationary risks.  With such worrying risks inexorably increasing gold (remember, insurance), went DOWN 40%.
 
How about in 2008, when the world went into a tailspin, and The Great Recession unfolded?  Gold fell in the second half of 2008 as the crisis intensified.
 
What about the long view?  Some clever people have calculated that gold buys the same amount of bread today as it did 2,000 years ago.  Feeling underwhelmed by the prospect of buying gold???
 
If you aspire to something better than mediocrity, gold is so dull it doesn't even fall into the category of mediocre.
 
But surely, I hear you ask, there must have been times when it was a good idea to buy gold?
 
You bet there were.  One of them was in the period 1999-2001, when the gold price drifted around a base of $250.  How could you have known this was a great opportunity to buy?  Is there a magic formula for working out the true value of gold, and whether it represents a "buy"?  No, there isn't a magic formula. There is an inherent problem with gold in that there is no easy way to measure its value - there are no profits, there is no income flow.
 
But if you observe the behaviour of investors you get some VERY big clues.  In 1999-2001 gold was widely loathed by investors.  If anyone had spoken loudly of gold being insurance or a safe haven or protection against inflation (or even deflation) they would have been pilloried. Yet from that dark time for gold it rose more than 7x until its peak in 2011.
 
That investors tend to be most confident (bullish) about an investment just as it peaks, at precisely the wrong time, is well understood - though sadly most humans (wrongly) think this applies to other people and not them.  The same applies in reverse - when most people are pessimistic (bearish) about an investment, you should not be selling - you should be buying.  Back in July this year a blog on this site ("Gold Bounce?") highlighted that one measure of sentiment towards gold suggested you should be buying gold.  That measure was the Daily Sentiment Indicator, which showed that there were just 5% bulls, for only the second time in recorded data.  (As an aside, the number of bulls at the top in 2011 was 98%.  Can you see how investors get this consistently wrong?)
 
After that blog the gold price did bounce, just under 10%, then from the Autumn it fell back to the same level.
 
Now there appears to be a similar “buy” signal, but with a possible gain in the range of 20-40%. 
 
How does that sound? In a world where double digit gains in a year are getting more rare, that's the kind of Christmas present which my two legged colleagues would love.
 
Those clever people at the Telegraph might just have it right after all.
 
Next week one of my (regulated!) colleagues will set out how to exploit this opportunity. (Though they have hinted in advance that you won’t maximise your potential gains with either gold coins or a gold ETF – I look forward to them revealing their profitable little secret).
 
FURTHER READING
 

Categories:

Market commentary

Print

Share this post: