JAKE'S VIEW
Jake's View
by

Why gold is no longer a precious metal

PUBLISHED : Monday, 05 December, 2016, 6:47pm
UPDATED : Monday, 05 December, 2016, 10:57pm

Gold traders expect the gold price to climb between 25 per cent and 50 per cent next year as a coming swarm of political uncertainties will lead investors to bet in the precious metal.

SCMP, Dec. 5

One day I shall read that gold traders expect the price of gold to go down next year. One day I shall also read that the moon is made of blue cheese.

Little could be more uncertain than the political events of the last half year – Brexit, the election of Donald Trump and now Europe in turmoil again with Italians scorning constitutional reform. On every side voters have rejected rule by bureaucrat through tamed establishment politician.

It should mean a flight to gold in a scramble for a bastion of security. But yet for the last six months gold has trended down. The markets are not spooked and I cannot imagine what “swarm of political uncertainties” gold traders could have in mind for 2017 if those of 2016 did not suit their book.

The value of your savings now depends only on your faith that the monetary authority appointed by your government will not cheat you

There is another trend of interest I also see here. I have constructed a simple, arithmetic index of US dollar prices for six base metals and you see it in the blue line in the chart, set to an index value of 100 for June 30 this year. These metals are aluminium, copper, lead, nickel, tin and zinc.

This index is non-weighted and I am not going to claim great representative accuracy for it. But it still tells an obvious story, which is that base metals have enjoyed a strong market for the last six months while gold has languished. This is what you might expect in times of relative calm.

I shall set out my mantra on these matters again. Financial markets can be shaken by economic uncertainty but do not generally move much or long in reaction to political uncertainty, particularly when it is just the sound and fury of constitution mongering. The chart suggests that most people think things are looking up.

However, even if it were true that great uncertainty lies just around the corner and worldwide economic collapse is at hand, I cannot understand how gold bugs think that gold will be a refuge to keep them safe.

Financial markets can be shaken by economic uncertainty but do not generally move much or long in reaction to political uncertainty

If enough of them believe it then, yes, they can make it true. Gold will hold its value. But if enough of them believe that conch shells are a safe refuge, then conch shells will also hold their value. So would Christmas trees or portland cement or almost anything you care to name. It will be valuable if enough people value it.

But the gold bug theory goes a bit further. It says that gold used to be the backing for paper money everywhere (forgetting that in China it was silver) and terrible things must inevitably happen to us because we have abandoned the gold standard. Gold will return.

Now I agree that we have indeed paid a price for going off gold. The US Federal Reserve Board and the European Central Bank would never have been able to destroy the price of money with their quantitative easing if they were still fixed to the gold standard.

But there was never a way in the economic boom of the last century that the stock of the world’s gold reserves could match the need for monetary backing at a fixed price and it certainly cannot happen now.

Whether you like it or not, the value of your savings now depends only on your faith that the monetary authority appointed by your government will not cheat you.

Which says to me that there is no longer such a thing as a precious metal. They are all base metals now and one in particular is still overpriced.

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