Tuesday, 16 October 2012

As money hides away, Gold heads for a blow off top

Interesting views to be expressed in the FT, although in the FTfm sub-section, from John Dizard who often has a different perspective. Usually worth following the "comments" at the FT.
Dizard points to the real mania being in sovereign debt and its end being potentially the stimulus for gold's own blow off. Sounds like he reads Sinclair !

An interesting signal of this acceleration of the long-term rise in the price of gold has been the recent outperformance of gold shares relative to the metal. Up to now, gold shares have tended to disappoint, but since the spring, the price of gold shares has been going up much faster than the price of the metal. In the third quarter, for example, the dollar price of gold rose by 10.9 per cent, while the broad XAU index increased by 21.7 per cent.
But we don’t have the sort of bubble in gold stock demand that you see in a real mania. The money flows into gold stocks have been modest, and valuations relative to the cash flows, or the net asset value of gold reserves, are still fairly low. There hasn’t been any flood of dubious junior mining stocks based on pieces of moose pasture in Northern Ontario or desert in Nevada. No doubt that will all come, or some early 21st century version of those 1970s phenomena, but not yet.
I’ve noticed that gold manias, or, if you will, crashes in the value of paper money, tend to occur in three phases. Initially, there’s a gradual, creeping devaluation of a currency, which can take a decade or so to gather force. Then, there’s an initial inflating of the gold bubble, or deflating of the currency value. That’s more or less what we saw between 1972 and 1974. Then a pause, and pullback in gold’s price momentum, followed by the seemingly unstoppable rise. That came from 1978 to early 1980.
All manias come to an end, of course. The one that’s ending now is the seemingly insatiable demand for developed country sovereign debt.


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