‘Sell gold‘.
That’s the message from FT columnist Peter Tasker, a Tokyo-based analyst with Arcus Research. As far as he’s concerned, gold’s bull market is over.
I’m a fan of Tasker’s writing. He often talks a lot of sense. And I normally agree with him.
I even agree with many of the points he makes about gold.
But not quite all of them…
If gold is such a ‘safe haven’ asset, then why hasn’t it rocketed during the euro crisis?
This has become one of the key arguments of gold bears. And it’s one that Peter Tasker makes in his latest column for the FT. ‘Where is the haven that offers protection against the turbulence of markets? Guess what: there isn’t one.’
He’s absolutely right. The term “safe haven” is lazy shorthand used to describe any asset that people pile into when they are feeling scared. But there is no such thing as a consistently “safe” haven.
For example, UK gilts, US Treasuries, and German bunds have all variously been described as “safe havens”. But they are among the most overvalued assets on the planet. And their prices fluctuate on a daily basis, so they don’t offer any sort of guaranteed protection against capital loss.
And let’s be very clear – gold isn’t a “safe haven” either. Try telling anyone who bought it in 1980 that gold protects the value of your money, and you’ll probably be greeted with a sardonic laugh. It might do so over the very long-term, but a 20-year bear market is enough to test the patience of even the most ardent goldbug.
What most people outside the financial world understand by the word “safe”, is that an asset provides a guaranteed safeguard against a nominal loss of capital (ie ignoring inflation).
The only asset that does that is cash. And unless you keep it under a mattress, even that guarantee is only as good as the government-backed deposit insurance scheme that stands behind your bank account. More to the point, it will do nothing to protect you against currency devaluation, debasement, or general inflation.
So why hasn’t gold performed spectacularly during the eurozone crisis? Here’s why. If the eurozone collapses, the outcome that people fear most is deflation. That explains partly why so much money has piled into bonds that yield very little.
During deflation, cash becomes more valuable. If prices are falling, a fixed amount of cash will buy more. So as long as you’re holding on to the right currency, you can do very well. Even a minimal yield on a bond issued by a reliable government, will be a big improvement on the complete absence of yield offered by gold.
In fact, I’d argue that the real wonder is that gold has held up so well during the eurozone crisis, particularly when you compare it to most other commodities.
The answer to why gold has held up so well? Well, if deflation is allowed to have its way with the eurozone, then you can expect mass defaults across the globe. That would be very bad news for the global financial system. In turn, that would increase physical gold’s appeal, because it’s one of the few assets that isn’t anyone else’s liability. Its value may rise and fall, but it will never go to zero.
The alternative – and I’d say more likely – scenario is that whatever lies directly ahead, the end game of this crisis involves central banks printing a lot more money. Again, that scenario is good news for gold.
The biggest threat to gold, as far as I can see, is if central banks start to hike interest rates. That time may not come for quite some time. And when it does, it’ll probably be in response to rising inflation, which tends to be good news for gold in the early stages in any case.
That doesn’t mean that gold is the only thing that should be sitting in your portfolio. It would be stupid to have 100% of your money in gold, just as it would be stupid to have all of your money in any single asset class.
And gold is certainly not as cheap as it was 10 or 11 years ago, when it was self-evidently undervalued. As Tasker puts it, ‘some assets offer more value than others’. He cites stocks in Japan and Europe, both of which I’d happily add to my portfolio just now.
Tasker also notes that US house prices are very low relative to the price of gold. Again, if you’re going to consider buying property somewhere in the world, I’d agree that the US looks more promising than most.
But I’d also hang on to gold. My view is that 5-10% is about right, but your exact allocation would come down to your own circumstances. It’s there to protect you against extreme financial risks, and there’s still a good chance that we’ll see more of those in the near future.
Also, I’d keep a close eye on the gold price over the coming months. As my colleague Dominic Frisby has pointed out on several occasions, gold’s bull market has followed a fairly reliable pattern of hitting new highs, then consolidating for periods of around 18 months.
The last peak came in late summer of 2011. So we’re not far off the 18-month mark now. If the pattern holds, 2013 could be a very profitable year for investors in gold.
John Stepek
Contributing Editor, Money Morning
Publisher’s Note: This article originally appeared in MoneyWeek (UK)
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