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21-07-2015, 08:07 AM
Why the gold price is tumbling
BUSINESS SPECTATOR JULY 21, 2015 8:18AM
Alan Kohler
Business Editor at Large
Melbourne
The bear market in gold took a rather dramatic turn for the worse yesterday when the price gapped down to its lowest level in five years due a big sell order in Shanghai.
Since peaking at above $US1800 an ounce in September 2011 it has been downhill all the way; the strategy of hedging exposure to fiat currencies and financial assets by buying gold bullion in one form or another after the financial crisis has turned out to be a very bad idea.
The non-appearance of inflation and the non-collapse of the US dollar have produced a bear market in all commodities, with the Bloomberg Commodity Index yesterday touching its lowest level since 2002. But gold, as always, has been a special case.
Last year some pundits were predicting $US5000 an ounce, now there are predictions of sub-$US1000.
It was a commonly held view that the gold price would inevitably rise as the world’s central banks printed money, apparently without limit.
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MOREMiners hit by gold price plunge
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Surely, went the almost conventional wisdom, as the supply of paper money massively increases, and it becomes increasingly distrusted, the world will return to trusting the only true store of wealth — gold.
In fact all those who allocated some of their money to gold bullion, gold ETFs or gold miners have lost money and the gold mining companies that were increasing production and mapping new seams just four years ago are now facing closure.
The fact that all commodity prices have fallen a lot — gold, oil, iron ore, base metals — is obviously terrible news for a commodity exporter like Australia.
The economy has slowed, wages are stagnant and governments are being forced to raise consumption taxes; the only good news about lower commodity prices for Australia is that the currency has fallen as well, providing a cure for the Dutch disease that saw the closure of the car industry.
But at a global level the falling gold price is not such bad news.
It’s happening because the US economic recovery is no longer in doubt, as a result of which the Federal Reserve is virtually locked into a first interest rate increase this year. Financial assets and the US dollar are no longer at risk.
And global inflation did not appear as expected, let alone hyperinflation: global inflation peaked at 4 per cent and many central banks are now trying to get it back UP to 2 per cent.
A chart of the nominal and inflation-adjusted gold price over the past 100 years suggests that the gold price might have a lot further to fall.
It tells you the “normal” price is about $US500 and there have been just two spikes to around $US2000 an ounce — in 1980 because of the actual runaway inflation of the 1970s, which was quickly corrected, and in 2011 because of an expectation of runaway inflation that turned out to be wrong.
After the inflation spike of 1980, the gold price returned to $US500. Will it do that again? That’s impossible to say of course, but it’s worth observing that high gold prices are usually associated with economic difficulties and low prices with calm and prosperity, so maybe that wouldn’t be so bad, if it happened.
Except that it would imply much lower commodity prices generally, a sub-US50c Australian dollar and some difficult, but not impossible, adjustments for the Australian economy.
The good news is that these are long cycles, so it could take 10 years for gold, and commodities, to reach bottom, so plenty of time to adjust.
But as we saw yesterday, there can be jagged edges along the way.
BUSINESS SPECTATOR JULY 21, 2015 8:18AM
Alan Kohler
Business Editor at Large
Melbourne
The bear market in gold took a rather dramatic turn for the worse yesterday when the price gapped down to its lowest level in five years due a big sell order in Shanghai.
Since peaking at above $US1800 an ounce in September 2011 it has been downhill all the way; the strategy of hedging exposure to fiat currencies and financial assets by buying gold bullion in one form or another after the financial crisis has turned out to be a very bad idea.
The non-appearance of inflation and the non-collapse of the US dollar have produced a bear market in all commodities, with the Bloomberg Commodity Index yesterday touching its lowest level since 2002. But gold, as always, has been a special case.
Last year some pundits were predicting $US5000 an ounce, now there are predictions of sub-$US1000.
It was a commonly held view that the gold price would inevitably rise as the world’s central banks printed money, apparently without limit.
Start of sidebar. Skip to end of sidebar.
MOREMiners hit by gold price plunge
End of sidebar. Return to start of sidebar.
Surely, went the almost conventional wisdom, as the supply of paper money massively increases, and it becomes increasingly distrusted, the world will return to trusting the only true store of wealth — gold.
In fact all those who allocated some of their money to gold bullion, gold ETFs or gold miners have lost money and the gold mining companies that were increasing production and mapping new seams just four years ago are now facing closure.
The fact that all commodity prices have fallen a lot — gold, oil, iron ore, base metals — is obviously terrible news for a commodity exporter like Australia.
The economy has slowed, wages are stagnant and governments are being forced to raise consumption taxes; the only good news about lower commodity prices for Australia is that the currency has fallen as well, providing a cure for the Dutch disease that saw the closure of the car industry.
But at a global level the falling gold price is not such bad news.
It’s happening because the US economic recovery is no longer in doubt, as a result of which the Federal Reserve is virtually locked into a first interest rate increase this year. Financial assets and the US dollar are no longer at risk.
And global inflation did not appear as expected, let alone hyperinflation: global inflation peaked at 4 per cent and many central banks are now trying to get it back UP to 2 per cent.
A chart of the nominal and inflation-adjusted gold price over the past 100 years suggests that the gold price might have a lot further to fall.
It tells you the “normal” price is about $US500 and there have been just two spikes to around $US2000 an ounce — in 1980 because of the actual runaway inflation of the 1970s, which was quickly corrected, and in 2011 because of an expectation of runaway inflation that turned out to be wrong.
After the inflation spike of 1980, the gold price returned to $US500. Will it do that again? That’s impossible to say of course, but it’s worth observing that high gold prices are usually associated with economic difficulties and low prices with calm and prosperity, so maybe that wouldn’t be so bad, if it happened.
Except that it would imply much lower commodity prices generally, a sub-US50c Australian dollar and some difficult, but not impossible, adjustments for the Australian economy.
The good news is that these are long cycles, so it could take 10 years for gold, and commodities, to reach bottom, so plenty of time to adjust.
But as we saw yesterday, there can be jagged edges along the way.
