Is there a ‘floor’ under the gold price?
Since 2001, the gold price has risen from below $270/oz to almost $1800/oz – a compound growth rate of around 17% p.a. which has made it one of the most rewarding assets to hold over that period. The majority of commentators now seem to be born-again gold bulls, with ever increasing long-term price targets being put forward, justified by gold’s status as an alternative currency in a time of economic uncertainty and unlimited quantitative easing.
While we can’t see a reason for gold’s run of strength to end in the short term, we are mindful of the long-term downside risks that attach to such a strong rise in price for an asset that does not produce income. Following a spectacular run between 1970 and 1980, it is worth noting that gold lost over 80% of its value in real terms during the following 20 years.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
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Matthew Bell
:
Hi Roger,
The gold post is related to your deleveraging post from yesterday and I wonder how the gold price will fair if we really are in for a period of deleveraging? All assets would be sold off and if European governments are to pay off some debts, the reserves of gold may be used to pay some of it off.
There are some large forces at work with the US Fed and other central banks doing all they can to bring on inflation. It is the million (trillion gazillion) dollar question which of the forces (inflation or deflation) will eventually win. Even if inflation does take off, I am not sure how gold will react. Inflation would lead to higher interest rates eventually and the gold price would then come under pressure. But on the other hand it should be a good inflation hedge from conventional wisdom. Your example of the high inflation 1970’s decade is a hint at what happened previously. Perhaps you can shed some of your insight?
Thanks, Matt
Roger Montgomery
:
Cautiously optimistic is perhaps the best description of our position.