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.
Produced and directed by
Jon
adam says
while your blogs are a good read, could you please spend a bit more time proof reading them? every article has three or four grammatical errors that stops me, the reader, in my tracks while i try and work out what you are trying to say. often i’m re-reading the sentence five times before i work it out and then i lose (not lose not loose as many people believe to be the case) your train of thought.
Mike says
Adam, I think you should look at your own grammar first.
Sentences begin with a capital letter.
Aaron says
@Adam – Don’t sweat the small stuff.
@Jon – I followed your train of thought perfectly. And I very much enjoy the conversational style that you use. I can also see why folks that love detail might not. Can’t please everyone without a crazy amount of effort and potentially losing the message in all the noise. Right?
Steve says
I really enjoyed reading this article, thanks for posting it; it does make an awful lot of sense. Also thanks to Adam for giving me the best laugh of the day………talk about the pot calling the kettle black….have you not heard of when to use capital letters Adam? as in the letter I, or at the beginning of a sentence, lol. Its all good, thank you both.
Ben says
Perhaps Adam should go join an improve your English blog where he can feel that he is among like minded people.
judy says
Sounds like Adam is one of those jealous people who try & find any small fault, in an attempt to bring others down to his insecure level. Adam, you will feel much better about yourself, when you look for the BEST in others. Kind Regards Judy
dean says
Jons finally came up with the best advice known to man…get the girl and enjoy the summer…..ill back that one and take it to heart. (and wherever else it may lead..)
Jon…your optimism is for sure a good thing mate…can not knock you for that. (and im not gonna knock ya for ya spellin and stuff like that ok!) Pedantic anal behavior sadly diverts from intended and good discussion and debate.
And..debate and discussion is good…healthy…and important.
Now, of course, the economic signals that are out there are always open to interpretation and conjecture regarding their relevance and meaning,
Your continual manipulation of the data leading you to the belief of an impending property boom is of course kind and sought after words from your followers,..most of whom whose futures are intrinsically interwoven with such an outcome..Not only your followers, but your future hopeful “target market”, whom you hope to glean an income stream also from in the future. I have no problems with that, but it must also be taken into account, when reading for example your blogs, and or your partner in crime( he he)..Dymphna Bolt)
As you have discussed before, rationality and market movements are not actually bed mates…and “feelings” of the investors…the herd…managing the pulse..are all important strategies….and it is in this vein that i read your blogs…with interest of your perspectives..but with hesitations and questions…which of course we must nowadays.
Yes..the gold market is doing strange things..but there are undercurrants you may not be aware of Jon…here is one Gold bugs perspective “” Nominal prices are down, but scarcity is up. Lease rates are up. Physical shortages are baked into the cake. Eventually, the markets will figure it all out””. google this if interested in a counter view..
(The Gold Lease Story You Haven’t Heard )
The battle to save the american way of life vis a vis this printing money strategy is also inherently problematic, and destined to fail in my point of view. I feel very sorry for the future americans who have to confront the excesses of their forefathers loose behaviors..(our generation), and the impact of these strategies are far from felt yet Jon. I personally do not think things have bottomed out…and i think the worse is to come.
China..australias big bed partner in an economic sense is certainly struggling along, some could argue that soon we may find out about what diseases we have contracted by sleeping with the easy girl of asia as she put out all those years ago, but now starts to withdraw her favors as she matures and starts to itch…This doesnt bode well for our economy, our wage base, economic growth or rising real estate prices…bur this is just my opinion..
ahh..but its all conjecture…and it leads to much confusions and ill placed confidences…really..i wish everyone well, and hope if they pursue a real estate strategy as you espouse Jon..for now….Im gonna go enjoy your first bit of sound advice …its summer here in bulgaria and ive got a lovely wee gypsy lass to share the heat with.
SOS says
It is a most confusing time to be investing…half the commentators reckon USA is on the verge of a broad recovery thanks to their oil developments and QE, leading the world out of recession… The others firmly believe that QE, or worldwide printing of Monopoly money is going to cause a crash, the likes of which has never been seen before. Both scenarios seem equally plausible.
And graphs from the past performance of property don’t seem like a relevant predictor for the future, given the record number of countries teetering on the brink of bankruptcy. But then, Australia has net pop growth, which means we have a need to build more homes, and very low interest rates, often making it cheaper to buy than to rent. Hmmm….what to do?
stephen says
Love it, ive been telling all my friends who invest in gold to buy currency puts to hedge the hype and speculation since early 2012
As for your comments SOS I think property is next in line for the growth cycle in aus and if your serious about financial growth always buy under value with positive cash flow in high growth areas and never never never buy off the plan
Aloy says
These days, we are encountering lots of information. You read and you act. As a migrant, I feel happy that I am having an education in English due to the “great ” English colonial influence. The English you read and write has to be shared between British style and American style. The present generation follows the Aussie way of reading & writing. Some won’t pay attention to grammar and spelling that much. I feel sorry for people like Adam. What is important now is to get my message to every one, in a given time, unless you have some one or outsource your writing to get your message to people. In a “Blog”, there is no time for this. Majority will say that it is o.k to read as it is, with so many mistakes in grammar and spelling. May be, it is better to write in simple sentences to get your message to the world.
I enjoy reading Jon’s writing in any matter. This keeps me awake in this troubled world, all looking to have a better life. But I know that the “rich” can take lots of calculated risks and gain in wealth, where as if you are poor and just trying to catch up with the idea of becoming rich, you always pull back and not take this calculated risk. This is inbuilt in a poor person’s mind. Educating yourself and reading these sort of emails from Jon and his mates puts you in boxing seat to take these sort of calculated risks.
So folks, enjoy Jon’s reading. Who got the time to provide us with these sort of information?
Aloy.
Tassyscott says
The GFC over?mmmmm. Gold will make it’s way back, every market needs a correction. The U.S fed can’t continue to inject $85b per month into an economy without repercussions.