There are unkind gold bugs about who believe every time I write something negative about their favourite metal, its price subsequently rallies, so time to throw them a bone: a decade after the launch of the first gold exchange traded fund, the yellow metal is going nowhere, it’s Australian price of $1,507 an ounce is where it was 20 months ago without a dividend or interest payment to soften the underperformance.
And it could be worse – anyone buying gold at the peak in August, 2011, is carrying a capital loss of $291 an ounce at the time of writing, never mind the opportunity cost of not being in, say, appreciating and high-yielding bank shares over that period.
Of course the five-and-a-half years before that were very fine indeed for gold, running up from about $600 to $1800 when stock markets were not happy places – an expensive time to be wrong about gold’s appeal, as I was.
But for the quarter century before that, gold was a bit of a dud. Ignoring its brief spike in early 1980, gold took a very long time to rise from $400 to that $600. You would have done better leaving your money in the bank.
Which all goes to show there’s nothing magical or guaranteed about gold, despite what its most ardent supporters might claim. Like plenty of other assets, the yellow metal is capable of a good run and periods of doing not much at all. Most folks’ investment horizon is somewhat less than 30 or 40 years. So the problem for investors is working out what might be going to happen next, not lusting after the big rally that happened at some stage in the past.
That said, it is interesting to look at the happy coincidence of gold’s surge and the birth of the first gold ETF 10 years ago. Being able to buy and sell gold so easily through a security traded on the stock exchange democratised gold just in time for other factors to give it a big nudge, which in turn encouraged people to buy it and push the price along further.
Marketwatch.com had a nice summary of the gold ETF story for the birthday of the first fund, which just happened to be here in Australia. From nothing a decade ago, the thick end of $130 billion worth of gold is now held by various ETFs. Building from zero to $130 billion added extra demand with the usual impact on price – plenty of investors who wouldn’t have fancied keeping a gold bar in a safety deposit box with all its costs were happy to have a bet on an ETF instead.
The biggest driver for gold’s big run has been the US debasing the greenback by printing more of them to counter the GFC. In the aftermath of that, the Europeans and the Japanese have jumped on the same bandwagon. It certainly has made sense to get out of US dollars and yen into gold or Australian dollars or Australian shares or many other things that adjust in price for the greenback’s depreciation. (And to think that some of the rattier Americans still accuse the Chinese of currency manipulation...)
And that’s why I suspect the gold bubble isn’t about to pop just yet. I remain a gold bear, very happily in the Warren Buffett camp, but while the US is pumping out $85 billion a month in “quantitative easing”, gold will enjoy support. Whether that support will be enough to make it a worthwhile investment in Australian dollars, I’m not so sure.
I am sure though that when the US economy is strong enough to end QE, or even as it begins to phase it out, gold will be prey to almighty pop, a rush to the doors that will be hastened by the ETFs selling their gold stash.
A secondary driver on the way up was the swing by major gold miners from hedging their production to buying back their hedge books. A gold punter with an eye on the door would do well to look for any hint of gold miners starting to forward-sell their production again.
But don’t try to tell the hard-core gold bugs that – they remain fixated with the idea that paper money is just a passing fashion. Besides, they’ll be too busy celebrating because I’ve mocked their golden calf again.
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