Is gold a buy now, or should you wait for a possible autumn price crash?
With a six-year low for gold demand in the first half of this year and the lowest prices since the global financial crisis, the negative headlines for gold have reached something of a crescendo over the past month.
This is what you usually see at a cyclical bottom for prices in any financial market. The Reuters/Gems report on gold demand in the first half of the year was particularly damning, with the Chinese stock market bubble attracting a large group of previous buyers of gold.
However, the latest feedback from the Perth Mint, one of the largest gold refiners in the world, is that it cannot produce bars and coins fast enough to satisfy a sudden surge in demand from China, India and Thailand, as physical gold buyers there are responding to the lowest gold prices in many years.
It is probably no coincidence that the Chinese stock market bubble has also just gone spectacularly bust. Money is coming out of that market and into gold. That is the way money flows – out of one asset class that is topping out and into the one that appears to be at a bottom.
So have gold prices actually bottomed out? Or could there still be a dramatic lurch down in prices as in the wipeout during the 2008-09 global financial crash?
It’s a tough call, and on this question gold forecasters have indulged in more fudge than you would find in Cornish villages at this time of year. Even when I can get a clear statement out of them, there is always somebody who writes to me saying I have misunderstood it.
So at the risk of upsetting another gold bug, or more probably a shorter of gold, I can only say this – gold prices could well be at their bottom now because the negatives are stacked so high, and because I can see those negatives so quickly becoming positives in the near future.
Central is the assumption that US interest rates are going up and that this will be bad for gold, as it pays no interest. This is not very likely to happen, or will take place only in tiny steps, because the Fed knows that one wrong step will crash US equity and bond markets. Just the possibility of it happening has already brought the Chinese stock market to its knees.
Even if interest rates do rise dramatically, this is not necessarily bad for gold prices. They last rose exponentially in the late 1970s during a period of very high interest rates. The correlation sounds obvious, but actually it is false.
Then we have to ask: if gold prices have been falling while stock and bond markets have moved into unsustainable bubbles, then won’t the reverse also be true?
The money flowing out of equities and bonds will, at least in part, find a home in gold investment, and silver too if history is any guide. Given that the gold market is very small relative to stock and bond markets – less than one-fiftieth on one calculation – the impact on the price of money moving out of such large markets and into precious metals will be huge.
But it is still conceivable that precious metals could retest much lower lows than we have recently seen in another global financial crisis, perhaps this autumn. Why is that? In a crash everything moves lower because those in trouble have to dump all their assets and the good gets sold off with the bad.
That said, the gold price falls will be lower than on other assets, as the market will be anticipating that gold will rebound more quickly than anything else, as it did in 2010-11. At that time, gold prices rocketed from the bottom and silver prices rose a phenomenal eight-fold.
Could this just be a dress rehearsal for what is coming next in precious-metal prices? Actually yes, and there is a very good reason to think it highly probable.
The doyen of the commodities gurus, Jim Rogers, has pointed out that he cannot remember a single incidence of a commodity bull market without a 50 per cent fall in the price before a final exponential price surge that marks the real end of a bull market.
Gold has just had its 50 per cent retracement. That is to say, a fall in price to halfway between the starting point of about US$250 an ounce in 2000 and the top of $1,923 in 2011.
Now we should see the real boom in the gold price. This is totally contrary to what almost every professional forecaster is predicting.
Peter Cooper is the editor of ArabianMoney.net