Gold — you ain’t seen nothin’ yet
Gold may have reached new heights, but it has even farther to go, says this veteran British market observer. It’s all about restoring confidence.
Perhaps our headline should read, “You have not seen anything yet,” since our story comes from a member of the British aristocracy.
But however we phrase it, we’re talking about a dramatic prospect. Gold will reach $1,500 an ounce.
And this isn’t mere speculation. It’s inevitable.
So says William Rees-Mogg in The Fleet Street Letter. He is a life peer, with the title Baron Rees-Mogg. That alone may not make him an expert on matters financial.
But Lord Rees-Mogg’s resume, which includes a long stint on The Financial Times and editorship of The Times, is lengthy and eye-catching.
So when he predicts that the price of gold will be going much higher — and probably oil as well — he speaks from decades of experience.
The case he makes for gold proceeds from a simple idea. “Gold offers two qualities that are seldom found together: liquidity and reality.”
It can almost always be bought, sold or exchanged and is a real asset, unlike paper currency (not to mention the perplexing financial instruments that swarmed onto the market in recent years).
But what it is that will push gold up to untold heights?
Big responsibilities
The question might be, what won’t push gold up? Lord Rees-Mogg delineates the series of events that has pushed just about everything higher — with one important exception.
In the past six months, most of the world’s stock markets have rebounded to the tune of 50 per cent or greater. There has also been a major rebound in the price of oil.
And there’s more to oil’s acceleration than supply and demand. “In the oil market there has always been heavy two-way trading in options,” his lordship points out. “There could be a sharp spike in the oil price if speculators had to cover their positions.”
The odd one out, of course, is the U.S. dollar. It stands at 1.47 to the euro and 1.64 to the pound. This is close to a 14-month low on a trade-weighted basis, Lord Rees-Mogg informs us.
Low interest rates and the unimaginably high fiscal and trade deficits in the U.S. are the culprits, of course. But even as it licks its wounds, the greenback still carries big responsibilities.
A very shaky situation
The dollar remains the world’s reserve currency, with the euro in second place. But this leaves us with a very shaky situation.
“Investors are naturally anxious to protect themselves against markets, including currency markets, which have shown such a high degree of volatility,” says Lord Rees-Mogg.
The ones who are suffering most from the dollar’s delinquency are the Chinese, who hold the greatest number of dollars in their reserves.
But can the world turn to the euro? Not with great confidence, says this observer. The euro is potentially threatened by “the weak productivity of Mediterranean economies. There is a big stretch in productivity growth between the German and the Southern European regions.”
All of these developments have been in the news for some time now. But put them together and look closely, and you recognize just how long we’ve been treading on shifting sands.
Bullish on both commodities
The fall of the U.S. dollar, of course, includes a devaluation of the dollar against gold. Dollar down, gold up is a common theme these days.
“The circumstances do indeed appear to be uniquely favorable to gold,” says Lord Rees-Mogg, who proceeds to enumerate all the things that are working its favour.
“Interest rates and therefore carrying costs are exceptionally low; the dollar is exceptionally weak; the technical market position is strong, including good demand for gold jewellery; the oil price — which is often linked to gold — is rising.”
His lordship is bullish on both commodities. He would not be any more surprised to see oil rise to a level of $120 to $140 barrel than he would be to see gold hit $1,500 an ounce.
Crisis of confidence
“One reason for expecting a higher gold price is the way in which the panic in banking has spread into the currencies,” Lord Rees-Mogg says. All paper currencies are the debts of the Central Banks that issue the notes.
Gold is an asset unto itself, and not a debt of any bank or government. The more nervous people are about currencies, the more attractive gold will be. And there’s another crisis of confidence.
“The recession has destroyed investors’ confidence, despite the remarkable recovery of the last six months,” says the author, “and some of the confidence has been destroyed permanently.”
In times of stress cash may be king, he adds, but gold offers the most reliable liquidity — “it does not depend on anyone’s economic policies; it stands for what it stands for, it is what it is.”
Practically speaking, this seasoned observer believes investors should have five to 10 per cent of their holdings in gold. “That would have been an excellent policy at any time in the last ten years. It will probably be a good policy for the next ten years as well.”
The Fleet Street Letter holds with two options: you can buy a gold exchange-traded fund, or you can go “whole hog” and buy physical gold through a bullion dealer.
Either way, if Lord Rees-Mogg is correct, it’s just possible that all that glitters really is gold.
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