Why you shouldn’t try to analyse gold

Selling your assets for a profit is what matters most in commodities investing. And for that, gold isn’t the best commodity to own, says Tom Bulford. Here’s what is.

Last week, I met a man who was suffering from the sudden loss of value of his gold. “But” he explained, “it’s an insurance policy in case things go wrong.”

Well, I thought, something has gone wrong. The value of his gold has just dropped by 15% in the last month! That is not how insurance is supposed to work…

Of course, I know what he really means. He reckons that if the world’s paper currencies are devalued by a monetary binge designed to inflate away our enormous debts, his gold will come good. Well, maybe…

But gold is not a rational beast. Or perhaps I should say that those who invest in it are not rational beasts. There have been a number of explanations given for the sudden plunge of the gold price. And today I want to tell what I think is really going on. And I’ll point you towards a better commodity to own right now.

The economic outlook versions

Let’s start with the ‘actually there is not so much to worry about after all’ crowd. They point to the revival of the US economy and the renewed belief that the eurozone can hold together. OK – but nobody seriously believes that the euro is out of the woods, and while the US might be doing better, the world’s other major economy, China, does seem to be taking a dip.

The second explanation of gold’s slump is precisely the opposite of the first. The problem is not that the economic outlook has improved, but that it has got worse. Suddenly the Chinese are not feeling so rich, and have stopped buying gold. And the crisis in Cyprus has revealed the flaw lines in Europe – but this turns out to be neither bad for the gold price nor good.

Cyprus, it is said, will be obliged to sell its gold reserves to contribute to the cost of its bail-out, and other eurozone countries might one day be forced to follow.

Bitcoin, risk-averse trading, increased taxes

The notion that gold is good to have at times of geopolitical risk hardly squares with the developing crisis in North Korea, but financial analysts have a few other arguments up their sleeve.

Demand from India has slipped due to an increase in taxes on bullion. Hedge funds have been dumping gold to splurge on the virtual currency, bitcoin. Investors are selling gold to return to the stock market. Traders have become more risk averse in April and have been paring back their bets on all financial instruments, gold included.

Here is another purported reason for gold’s tumble: if the dollar goes up, implying a return of confidence to the world’s major paper currency, then the price of gold should fall. Fair enough, except that the dollar index peaked at the end of March and actually slipped back in April.

 

Try this instead: there is a correlation between the oil price and the gold price. As the former falls, as it has been doing recently, so does the latter. If this alleged link has any basis, I have no idea what it could be.

What about the dramatic decision of the Bank of Japan to adopt turbo-charged quantitative easing, surely a disaster for the value of its paper currency? That surely should have sent yen holders rushing to gold… but it has not.

One by one, the arguments of gold analysts are being blown out of the water. That just leaves the chartists. One talks of the bursting of  “a rational stochastic bubble”, while according to a second, “the price of gold commenced a textbook super-exponential blow-off trajectory in ’09-’11, reaching terminal velocity and price in the $1,900s. The anti-bubble trajectory and bearish Elliott wave and descending triangle patterns project targets in the $1,000s-$1,100s to as low as the $800s-$900s in the months ahead.”

The greater fool theory

Of course, the chartist argument really comes down to this: the gold price is going down because it is not going up. “Gold has had all the reason in the world to be moving higher — but it hasn’t been able to do it”, explains one metals trader. “The market is always right and you should not be arguing with the tape.”

Helpful? I don’t think so. I prefer the views of Guy Debelle, assistant governor of the Reserve Bank of Australia. He says that “gold often has a high price because people believe that other people think it’s worth a lot. But it does not have much inherent value.”

Quite. So if you hold gold, don’t try to analyse it. All you need to worry about is whether somebody else will take it off your hands at a nice price. It is called the ‘greater fool theory’.

Far better to buy a commodity when it’s dirt cheap, says my colleague David Stevenson. And David has just told me about what he believes is a tremendous opportunity for British investors. What he had to tell me was pretty shocking, but everything adds up.

If the government doesn’t get its act together quickly, millions of us could be at serious risk of blackouts in just two years’ time. Rationing may even be introduced into homes. The UK’s gas stores recently fell to dangerously low levels. And importing the stuff is a costly and troublesome feat. A solution is needed. And it’s needed fast.

This isn’t an oil story. But it is a story that David is calling “the trade of the decade”.

Watch David’s timely video on how Britain can cash in on this energy crisis.

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