Dreams of sitting on a gold mine
THE value of gold has soared as savers search for safe havens in an increasingly uncertain world. On Tuesday, gold hit $1,800 per ounce, rising $150 in just one week. In late July, the price reached $1,600 confounding the predictions of many experts.
The surge has spread to silver which enjoys a relationship with gold not dissimilar to that between oil and gas.
In recent weeks, the price of silver has jumped 20%, adding impetus to the market in precious coins.
In recent days, the mainstream media has begun to fasten on to the phenomenon, with the German tabloid, Bild calling on its readers to consider investing in the commodity.
The gold price has returned to the levels it reached in Autumn 2008, after the collapse of Lehman Brothers when the future of the global financial system was in the balance.
In a sense, we are headed back to the bad old days when nervous European savers/holders of financial instruments, fearful of hyperinflation and banking collapses, resorted to gold bars to protect the real value of their surplus assets.
Last week’s developments have their genesis in events occurring several years ago.
The price of gold began to move up in the middle of the noughties as shrewder investors grew nervous about real property and equities, amid growing signs that an asset price bubble was developing.
Gold, however, really only caught fire in the summer of 2007 when the credit crunch beganto rear its ugly head.
Since then, bar the occasional setback, it has been a case of onward and upward.
Investors have piled into gold in its various guises, investing in coins, in gold futures, in traded funds and in shares in gold exploration companies.
Governments have followed suit, adding to their gold hoard in an effort to protect the intrinsic value of their national reserves.
In late July, after the run on the sovereign debt of Spain and Italy, and amid growing fears of a US debt default, the price of gold reached $1,600 per troy ounce.
A deal was cobbled together in Brussels on July 21 with the aim of addressing the eurozone crisis, while a last-minute deal in Washington led to the US debt ceiling being raised.
Since then, however, global share prices have gone into meltdown amid concerns about a double dip recession.
S&P’s downgrade of US sovereign debt also sparked fears for the future, though ironically, the yield on US Treasuries has since fallen.
As the bad news piles up, investors have been fleeing in ever greater numbers to safe havens such as gold, US Treasuries and Swiss Francs. However, the number of such viable havens have shrunk.
The storm clouds are gathering over the Japanese economy. More and more once stable European countries are being dragged into the sovereign debt frame, France being the latest to become the object of speculation about a writedown in its triple A credit rating.
So are we witnessing yet another bubble similar to that in technology stocks, or in property, a bubble driven by fear? In truth, only time will tell.
Pessimists believe the gold price still has a long way to go. If this turns out to be the case, it means that we really are entering a turbulent period in which ordinary savings could be greatly eroded, if not wiped out.
But first things first. Why has gold assumed its starry place in the firmament?
The prosperity of the global economy was underpinned between 1850 and 1914 by the fact that the leading world currencies were tied to the gold standard, thereby ensuring that the real value of notes and coin was maintained.
The outbreak of WWI changed this until, in the 1920s, Britain resumed its tie to the gold standard before breaking the link as deflation took hold.
In the 1930s, the new US president, Franklin Roosevelt, diluted the link by increasing the value of gold relative to dollars in an effort to tackle the debt and unemployment crisis. A link of sorts was re-established as part of the new post-WWII order introduced by the Bretton Woods Agreement.
The financing of the Vietnam War triggered the unravelling of the agreement in 1971, heralding the era of stagflation in the 1970s.
The price of oil surged and gold moved up in value reaching $850 an ounce in the early 1980s, a peak in dollar terms only now being approached again.
Mark O’Byrne,a UCD history graduate, founded a Dublin-based company, Goldcore, in 2003, having developed an interest in gold. He spotted gold’s potential as an investment vehicle and spotted a gap in the market in Ireland.
“Early on, I became worried about the property market, but we were dismissed as gloom mongers.”
As the economy unravelled, his firm attracted interest among investment advisers.
“Only now has gold begun to come into the investment mainstream.”
Today, he employs 14 people and acts as adviser to fund managers such as FBD.
Since 2005, Goldcore has acted as agent to the Government of Western Australia. Its certificates have a triple A rating. It also sells gold bars produced in Canada and South Africa.
O’Byrne advises people & against piling into gold. Instead, they should limit the share of assets held in gold to between 3% and 10%.
He accepts that “at some stage, this will become a bubble .. everyone piles in towards the end.”
He does, however, believe that there could be quite a way to go before this stage.
Further rises look on the cards as the storm clouds of Autumn approach.
People should carry out a due diligence, researching and informing themselves, posing the question whether the company or individual they are dealing with has the necessary qualifications and is authorised by the Central Bank.
Beware of companies using Irish logos which in fact, have no connection to this country and are not regulated here.
There have been reports of scams in this country, with people in the Munster area allegedly being ripped off by con artists. At the other end of the scale, unregulated gold shops have been purchasing gold items from people at prices way below the market price.
Gold is promoted as a hedge against inflation. Indeed, the businessman Steve Forbes, founder of Forbes magazine, is calling for a return of the US to the gold standard as a means of halting inflation.
However, one leading Harvard economist, Martin Feldstein, chairman of the US Council of Economic Advisers under President Reagan, doubts whether gold can really serve as a hedge against inflation.
Feldstein recalled walking through the airport in Dubai at the end of 2009 watching travellers buying gold coins.
As he noted, “such behaviour has pushed the price of gold coins from $400 per ounce to $1,100 now (in January 2010).”
He pointed out that between 1980 and 2000, the US consumer price more than doubled whereas the dollar price of gold actually fell (from $400 to $300).
In his view, acquiring index-linked Treasury securities is a much better hedge against inflation.
However, the recent erosion in the status of the US sovereign may call into question this view.
No one really knows where we are headed.
Says economist Austin Hughes, KBC Bank: “There is a blanket sense of unease out there. The current tremors or convulsions are centred on the US, also Europe and Japan. Gold by default has become the safe haven of choice. However, he warns about any headlong rush into gold given the sharp increase in its value to date.
In his view, one must expect the ride to be bumpy — whatever asset class, gold included, that one opts for.
One thing is clear. There will be no shortage of people wondering whether there is “gold in them thar hills.”
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