By Zak Mir.
Last week saw London graced with the presence of Spreadbet Magazine’s founder, Mr Richard Jennings. As is ever the case, Mr Jennings and I had some lively debates over the current state of the markets. It really is interesting how, despite all the wonders of global online communication, face to face discussion really helps you get down to the brass tacks when talking about markets.
The main issue that came up was the “whites of the eyes” discussion about what the hell is going on with gold and gold stocks? Where is the great bull market? Why, after all the trillions of QE, zero interest rates, huge rise in real estate prices and horrific increased costs in private education, utility bills and many other aspects of daily life, has there not been a hyperinflationary boom?
To be honest though, answering these questions has not been so much of a conundrum for me as I have regarded the latest rally in gold with a good degree of scepticism. Admittedly not as much scepticism as Gordon Brown had a decade ago when he sold off Britain’s reserves at the bottom of the market, but certainly enough not to have got involved in the latest move.
Even so, I can understand why investors and traders go long gold. In the wake of the Financial Crisis the justification was clear. In light of the recent bubbles in stock markets and property I can see a certain degree of sense in it now. However, where the bullish case starts to fall apart in my mind is when you consider the deflationary forces that have been at work in economies. It is certainly true that financial assets have exhibited many of the characteristics one would expect in a hyperinflationary environment, but if you extend your view further than this narrow view of life, the picture becomes less clear.
Across the board there has been a brutal deflation in the prices of many consumer goods, costs of labour and services. Consider for a moment the impact of perhaps the greatest deflator of all; the Internet. Thanks to the growth in trading across the Web, as well as the growth in emerging economies, where in the past there might have been a great deal of inflation, today there hasn’t. This is even more surprising when you also take into account zero interest rates and all the money printing that has gone one.
So where does this leave the gold bulls and gold bears?
The problem, as I see it, is “selective hyperinflation” and “selective deflation”. In other words, arguments could be made for either case, depending on which data you look at, but neither side has an overwhelming case.
If you look at the situation from the perspective of cold, hard numbers, it is surprising that gold is $1,000 more expensive than 12 years ago. If you compared the rise in gold to the rise in London property prices over the same period, gold should be trading at $4,000/oz!
But it isn’t. With so much wealth destroyed in 2007/08 it might still take many years before the situation flips from “selective hyperinflation” to “general hyperinflation”. This will almost certainly happen, but the question is when? It could still be many months or even years away. As SBM hero Hugh Hendry has reminded us, being early to a party can be much more painful than being late…