World stock markets are down this morning on renewed worries of a Greek default. Adding fuel to the fire, President Obama’s proposal to levy a new tax on millionaires—dubbed the “Buffett Rule” after being suggested by billionaire superinvestor Warren Buffett—has drawn a sharp rebuke from Congressional Republicans and threatens to unleash more political instability on a crisis-weary public. And U.S. homebuilders, citing the effects of never-ending foreclosures, are even more despondent than feared according to the National Association of Home Builders survey released this morning.
With the finance world appearing to teeter on the edge of disaster, one might expect that standby crisis hedge—gold—to rise.
Yet a funny thing happened this morning. The price of gold actually fell sharply.
The spot price of gold has continued to drift lower after surging to new all-time highs above $1,900. As this article is being written, the price has fallen to $1,783 and appears to have lost all momentum ($GLD $GC_F).
Gold’s recent weakness comes even as competing crisis hedges have lost their luster. The Swiss National Bank took a sledgehammer to the Swiss franc two weeks ago, pledging to lower its value against the euro. The tactic worked, sending the franc down nearly 10%. U.S. Treasuries—considered by many to be the ultimate safe haven for their liquidity—now yield far too little to be attractive for most investors. The 10-Year note yields a miniscule 1.95%.
Gold’s recent action should be deeply disturbing to gold bugs or to anyone using gold as a refuge from the market’s volatility.
While I hesitate to definitely say the gold bubble has burst (the market gods tend to punish those who would be so vain), it is becoming increasingly likely that this is the case. You can never say with certainty until after the fact, but the anecdotal evidence suggests that the peak—if we haven’t seen it already—is near. Let’s take a look at a few today:
1. European central banks are buying gold again. The Financial Times reported this morning that European central banks have become net buyers of gold again for the first time in more than two decades. These bankers buying gold near its all-time highs above $1,900 were the same people who couldn’t get rid of their gold fast enough when it was trading below $300 per ounce. This shocks even me. While I’m not surprised to see emerging-market central banks go down this route—Mexico, South Korea, and Thailand have all been big buyers this year—even a cynic like myself expected the Europeans to have learned their lessons.
In any event, given the dismal timing record of central bankers, investors should use this as a contrarian indicator to bet the other way.
2. Gold appears to be overvalued relative to other precious metals. The price of platinum will generally trade at a significant premium to that of gold; as recently as five years ago, the platinum price was nearly double the gold price. This makes sense, as platinum is far rarer and has far more industrial uses in addition to its role as jewelry. Yet today, gold is more expensive than platinum. Why? Because it’s not being aggressively hoarded by speculators and by investors searching desperately for a safe haven.
Gold’s traditional use as jewelry has been in steep decline for years, even while record amounts of it are being salted away in bank vaults for “investment purposes.” This doesn’t mean that the price will fall tomorrow, but it should raise questions about the durability of a bull market in gold.
3. The smart money has started to lose interest. George Soros made quite a splash earlier this year when he exited his rather large position in gold (See “Soros is Selling Gold”). While no one should mindlessly ape the trading moves of another investor—even one as talented as Soros—it can still pay to take note of what the all-time greats are doing. If Soros no longer sees value in gold, it is fair to ask: Why should we?
The Donald likes the gold.
4. It’s all about The Donald. I include this one more for comic appeal than anything else. Donald Trump made headlines last week by accepting $176,000 in gold bullion as a security deposit from a new tenant.
In his comments to The Wall Street Journal, Trump said “It’s a sad day when a large property owner starts accepting gold instead of the dollar… If I do this, other people are going to start doing it, and maybe we’ll see some changes.”
While Mr. Trump has made billions as a property developer, he also has a habit of putting his foot in his rather large mouth. It would only be appropriate if this blustery political rant marked the top of the bubble. Add Trump’s little publicity stunt to the “bear” column for gold.
The gold bubble appears to have sprung a small leak. It could still be patched, of course, and we could see the bubble expand a little more before it pops. But given gold’s recent lackluster performance in the face of continued crisis, I wouldn’t bet on it. Once the bubble begins to deflate in earnest, the gold bugs are not likely to fare any better than Miami condo speculators or “dot com” true believers.
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or it’s not a bubble..and it actually makes sense?
Gold has reached a top? Really? With the G3 devaluing their currencies, where is an investor to turn to offset the foolishness heaped upon us by the politicians and the central bankers? Clearly, currencies and government policies (both ficscal and monetary) have not been effective and are damaging the capital stock (value of the markets and the real estate). I find very little to invest in that works, including cash.
Still, I live in the middle of the Marcellus Shale and will have an offset to the mess in the investment markets as my gas wells come on line, providing the east coast with cheap reliable energy for decades to come. My clients who are not property owners have a lot fewer choices.
Thanks Washington. Retirees living on Treasury Bond interest are slowly starving to death. Perhaps low interest rate policies should be discarded as they don’t work anyway.
Dan,
Your mention of the Marcellus Shale actually makes my case for me. In the shale property you have an investment in a REAL, cash producing asset that has economic utility. I LOVE natural gas investments, particularly pipelines.
Income is the key here. In an environment in which growth is hard to come by, you want your returns in cold, hard cash. You’re obviously not going to get that in the bond market, so that leaves income-producing properties like MLPs and select dividend-paying stocks that are strong enough to survive financial Armageddon.
Gold does not produce income, nor does it have much in the way of economic purpose. It’s value is based purely on what someone is willing to pay for it at that moment, making it a perpetual “greater fool” investment. As gold’s price action is proving today, gold is a speculation and a risky one at that!
Hope all is well in your neck of the woods,
CLS
Gold is an insurance. As per Bill Bonner, we are in a great correction, and this will correct everything – excess debt in the developed world, high real estate prices, stocks and gold. Gold may fall, even down to 1200$ levels. Gold is a hedge against the paper currencies. As countries default and people lose faith in their currencies, expect price of gold to go through the roof. The D day is still away – maybe couple of years more.