Owning gold is rather like gap year bus travel in Guatemala: it’s uncomfortable,
extremely nerve racking and you are surrounded by strange looking
bugs. It also happens to be the only way of reaching your destination when
money itself is a problem.
With fifteen percent of the fund in gold equities we are firmly wedged in
against the cockroaches and chickens, trying not to look over the edge as the
gold price veers wildly on its route to new highs. Many people see only the
risks involved in such journeys, which is understandable given the burnt-out
wrecks that lie strewn across the valley floor. In doing so, they ignore the
sometimes greater dangers of staying put.
Gold is a schizophrenic asset. For much of the time it is seen as a form of
money, arbitrating against other fiat currencies, in particular the dollar, as a
store of value. Then, occasionally, it acts like any other commodity whose
price is determined by underlying demand and supply dynamics. Sales by
central banks, which have huge reserve holdings of gold (estimated at 35,000
tonnes), are often perceived to be the swing factor in determining which
‘mood’ predominates.
The recent excitement in the yellow metal has been sparked by its price
appreciation as measured in currencies other than the dollar. In fact, the gold
price has made 18 year highs in US dollars while the dollar has been strong
against other major currencies. If we accept global bond markets’ assessment
that inflationary risks are limited (admittedly debatable), then the price action
suggests something new is going on in the gold market. To better understand
it, we should look through the prism of gold as a commodity.
Central bank sales for this year, agreed under the Washington Accord, were
completed some time ago and underlying mine supply is being squeezed by
other factors. First, the strength of the South African rand over the last
three years rendered much of the country’s production unprofitable. Its
production has fallen over 23% since 2000 and now represents only 14% of global
production. Secondly, the global commodity boom has created enormous inflation
in input costs such as steel, cement, and even tyres. Costs are blind as to whether
the hole in the ground produces copper, tungsten, or gold, so the cost curve for
the whole mining industry has been raised. With the latest World Gold Council
figures indicating a supply deficit and global demand up 18% this year, higher prices
simply reflect basic tenets of economic theory.
‘The second leg of the gold bull market’, as it is being billed, is exciting stuff for
gold bugs and technical analysts alike. We are a little more contained in our enthusiasm.
For us, gold’s true moment of glory will come if, or more likely, when
US financial authorities are forced to follow through on the November 2002
speech made by Ben Bernanke, the likely successor to US Federal Chairman Alan
Greenspan. In it he assured financial markets of the Fed’s ability to monetise away
the threat of deflation thereby debasing the dollar. Anyone not on the bus at that
moment will struggle to preserve their capital.
Until then, gold’s journey will continue to be wild and rugged. Optimising our
comfort will require careful navigation and plenty of bug spray.

I'm just reading his speech.

Perhaps this thread should be moved to "investments"...

Anyway - a question - for the financial experts on this site... According to the above referrenced speech, an argument for Gold exists regardless of whether the economy enters an inflationary or deflationary period, as the fix for the latter is to artifically stimulate the former.

During the last 12 years of deflation in Japan, the price of Gold dipped and recovered... showing perhaps limited manipulation of the economy...

Why didn't central bankers in Japan flood yen into the system ("printing money") to stimulate inflation and prevent this 12-year phenomenon? Surely this would have also had the effect of making their exports cheaper, thereby stimulation the economy further???

I think the main reason I'm asking this is to further guess what happens to Gold during a deflationary period, using Japan as the model. I'd like to know how much manipulation of the economy has been in place over the last 12 years, and whether Gold price movement over that period can be attributed to any one strategy. I suppose ultimately I'm keen to know whether there's a flaw in the "hold gold" opinion expressed so often on this board...

AF.