Monday, December 17, 2012

Is the Long Bull Market in Gold Over?

Back in 2000, I said publicly that I'd rather own gold than the Dow Jones Industrial Average.  The Dow was more than 40 times the price of an ounce of gold, which the UK government was selling at roughly $250 an ounce.  (At the peak gold price in 1980, the price of an ounce of gold was about the same at the Dow Jones Industrial Average.)  So it seemed likely to me that the Dow Jones and the price of gold would converge in price, not necessarily ending up at 1:1 but moving well away from 40:1.  Indeed, since the end of 2000, stock prices have had only modest gains, while gold rose more than six fold in price.

With gold headed for its amazing twelfth consecutive annual gain, when will its bull market end?  The conceptual case remains compelling, as central bank monetary policies are about as loose as they have ever been.  Short-term interest rates are near zero, and real interest rates (after subtracting inflation) are negative, which historically has been favorable for gold prices.  Central banks have been net buyers of gold for 19 consecutive months.  And it has become conventional wisdom that most investment portfolios should have a small allocation to gold, as a hedge against various negative outcomes.

But the price of gold peaked more than a year ago (in September 2011) at $1,921 an ounce.  It is now 11% below that.  Even though some esteemed investors, such as John Paulson and George Soros reportedly still have large gold holdings, the huge holdings of gold ETF's make me uneasy.  And in the financial crisis of 2008, gold was anything but a haven, as it plummeted along with other asset markets.

I no longer own any gold, partly because of the human and environmental toll that its mining entails.  I think there are more respectable, cleaner, ways to earn an investment return.

I had expected the end of gold's bull market to be marked by an explosive, "parabolic" spike, which hasn't happened yet.  And for gold to reach a new high on an inflation-adjusted basis would require a price of roughly $2,400 an ounce, 40% above current levels.  Either development would provide a large gain to holders of gold.

But I also wonder whether it is time to look elsewhere for an asset market that is underpriced and unpopular, and which provides favorable odds for significant gains.

Steve Lehman

Gold:  $1,700

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