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Published: November 23, 2009
Gold was all the rage again last week. But
why is it rising, and does anyone really know what it’s worth?
According to the way I calculate momentum, gold has just barely
entered the gravity-free zone -- where it has the potential to
start advancing a lot, with much more fluidity.
And that translates into much higher prices.
Although I normally abhor such popular and trendy positions, the
trend-following rules in my asset-allocation models are
screaming for a higher weighting than the current 5% in the
portfolios that I track in my Strategic Advantage newsletter.
The London Telegraph had an interesting analysis on Thursday,
based on an interview with Dylan Grice of Societe Generale SA.
The French analyst said the recent jump related to the purchase
of a massive amount of gold by the Indian central bank was very
similar to the French central bank’s effort to convert dollars
to gold in 1965, the slippery slope that led to the collapse of
the Bretton Woods currency agreement and the close of gold sales
under U.S. President Richard M. Nixon.
Grice recalls that, in the wake of the French move back then,
the price rose to a level that matched the U.S. dollar monetary
base and peaked at +140% of that amount. If that were to recur,
Grice said, in the wake of the big money print exercised by the
U.S. Federal Reserve under Chairman Ben S. Bernanke, gold would
have to reach a little more than $6,400 an ounce. (The
calculation is simple: The monetary base is $1.7 trillion and
the United States owns 263 million ounces of gold. Divide, and
voila!)
Could this happen? Well don’t let anyone fool you. Gold is
almost completely worthless except to the extent that people of
an era like to own it, and as such it has varied wildly in price
over the years.
Grice notes that is trading at roughly the same real price
now as in the mid-1400s, when an ounce bought a light suit of
chain mail. It then doubled in the Medieval bubble -- yes, they
had bubbles back then, too -- then crashed -90% over the next
500 years once the Spanish discovered scads of gold in the New
World and there were a few minor finds in places like
California, Australia, South Africa and Russia.
Grice told the Telegraph: ”Gold isn’t intrinsically safer than
any other asset. There is nothing mystical about it, either.”
And yet its uselessness is part of its charm, making it almost
the perfect currency in a time of inflated paper money.
Considering that virtually all major Western nations and Japan
are insolvent now, with far more debt than gross domestic
product (GDP), you can see why emerging countries like China and
India, which have not yet advanced to the point of bankruptcy,
would want to get their hands on it. Every generation will value
things that are important to it differently. Back in the heyday
of Holland, tulips were more valuable than gold for instance;
and in the heyday of the Internet bubble, you could get
financing for a startup company based on a multiple of clicks
and eyeballs.
On Wednesday night, a friend in the hedge fund business told me
about a dinner hosted by Goldman Sachs Group Inc. in London last
week where the subject of gold’s value came up. Goldman asked
the room full of 15 or so major hedge fund managers to mark down
on a piece of paper the price at which they thought gold would
trade over the next two years. The consensus answer was an
astonishing $4,000 per ounce.
Whether that’s the right number or not, it’s clear that gold has
become the most loved instrument in the world of late. I really
don’t think it has moved into bubble territory yet as it is
mostly just discussed in these terms by wizened gold bugs with
stains on their shirts, shady Vancouver Exchange stock promoters
and hedge fund muckety mucks. Once my sisters and neighbors
start asking where they can bogart some bullion, I will call
bubble, and not before.
-- Jon D. Markman
Contributing Writer
Money
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