The ‘gold bugs' are waking up in an unfamiliar house, wondering where their pants and their car keys are…
Woah. What happened?
I don't know when the GFC's actual time of death was. Probably sometime early 2012. But I do know that we held the wake in May of 2013.
And that knees-up left the gold bugs with a helluva hang-over.
In short, the gold price got smashed. It fell 23 percent between April and June – the sharpest quarterly fall in 90 years!
The price first plunged in early April, diving from around $US1600 to around $US1300 an ounce. After steadying around the $US1400 an ounce level for a while, oops, over it went again, falling to below $US1250.
So what's going on? If you backed gold over the past decade, you probably did quite well for yourself. The price was rising, in a major way, for 11 straight years in a row.
But now the gold bugs are waking up in an unfamiliar house, wondering where their pants and their car keys are. Woah. What happened?
If you ask me, the answer is this: There has been a fundamental shift in the global economic narrative. For a long while, since the start of the GFC, we'd been running with a kind of “Nightmare on Elm St” plot line, with monsters in every cupboard and you just now it's going to end badly.
Now, it's more like “Mighty Ducks” – a feel-good coming of age movie where a cast of lovable characters rise to the challenge of impossible odds.
And the man in the armchair, making sure everyone can see the pictures in US Fed Reserve Governor Ben Bernanke.
The gold tumble began in April when the markets picked up on a strengthening of language being used by Fed members around a possible exit from the QEIII quantitative easing program. There were a lot of hints and winks and reading between the lines, but by June is had been broadly confirmed that the ‘tapering' off of QEIII would begin sometime this year.
Cue inspiring montage, hopeful music.
Effectively the Fed was laying out a new narrative. The worst was over. The corner was turned. QE had worked and the economy looked, more or less, like it was back on track.
At the very least the spectre of a triple-dip recession was nowhere to be seen.
You could maybe argue that the Fed was overplaying its hand. There had been some mild improvements in the labour market. Housing prices had found a floor. But there were no shortage of monster footprints through the economic forest if you were looking for them.
But in the end, that doesn't matter. What matters is that the Fed said that things are looking better, that they're going to stop sending so much booze to the party, and everybody believed them.
This news was the anvil tied to gold's foot. It hammered the gold price in two distinct ways.
First, and this often gets overlooked, is that the stronger narrative surrounding the US economy led to a strengthening of the US dollar. Gold prices are denominated in US dollars so a stronger dollar means a lower gold price.
The dollar is up about 10-15 percent against major trading partners, so maybe half of the gold fall is due to the dollar alone.
Secondly, a huge part of the run up in the gold price was a bet on economic disaster. If you think that a currency is about to collapse (through say inflation or debt), or you think that the entire economic framework is about to be undone, then gold becomes a very attractive place to preserve your wealth.
And for a long time, when the Nightmare on Elm St plotline was in effect, economic collapse seemed like a real possibility.
And the critics of quantitative easing argued that it was effectively just money printing (which it was) and money printing has always led to run-away inflation (which it has).
But we haven't' seen inflation stick it's head of its gopher hole in years, and it seems like there might just be time for the loveable characters at the Fed to unwind the inflationary stimulus of QE before it does any real damage to the currency. (Can't you hear the music? That means we're on the brink of a real triumph and some valuable life lessons.)
And if its one thing I've learnt in this game is that being right in theory doesn't make you rich in practice.
People (including some of the largest fund managers in the world) who bought into gold had a tonne of excellent theory on their side. But economics, especially over a longer run, is an incredibly complex beast. It's tougher than long-range weather forecasting.
But personally, I think they underestimated how much vested interest everybody has (and not just governments) in keeping the game kicking along. No one wants to see the economy reduced to ruin. Even, deep down, the gold bugs.
And so our cast of lovable characters keeps muddling through.
But whatever it was, the bet on economic calamity never paid off. And now that the narrative has shifted – now that the consensus seems to be that the economy is getting back to normal – is going to be back to business as usual.
And by that I mean I think we can see an even bigger shift away from calamity bets like gold. (Gold was trading at around $800 an ounce before the GFC. It's still up around $1300 today.) There's a lot more scope for a gold unwind yet.
And as that happens, we'll see money flowing back into actual assets – assets that, unlike gold, pay investors some sort of return.
And that of course, means property.
This, together with growing confidence in the economy, should see property prices return to long run growth rates over the medium term. In the short term though, depending on how quick the gold unwind is, we could see a real spike in prices.
So if you're willing to bet against further economic collapse – which is effectively a bet on human ingenuity – property is an excellent place to position yourself to benefit from the unwind in the current overhang of calamity bets….
…and get the girl, and learn some valuable life lessons from a summer you'll never forget.
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