Why’s gold not shooting into orbit?

Posted by robin in Financial Articles Market Commentary Friday October 10, 2008 6:28 pm

We’re watching the disintegration of the financial system said the FT’s Martin Wolf recently.

Quite a show. Certainly beats London’s Millenium fireworks. As the walls of Mammon come tumbling down and long ignored clerics see their chance for a recruitment drive, what’s the story with that time honoured safe haven gold?

I mean why is it not shooting into orbit? Is the price smouldering on the launchpad and about to blast off to $2,000 as some commentators predict? I mean, how much more distress does the ultimate currency need? But then the ultimate currency is ultimately useless save for some piractical style dental work, coatings for the odd space mission and masses of Indian bling to feed ore-obsessed wedding rituals.

But gold is rare and that helps. All the ”barbarous relic” ever mined would fit into one supertanker they say. Not a boast you can make about a paper currency thanks to Johannes Gutenberg’s remarkable invention - the printing press.  And the price action on gold these days is more that of a hot tech stock in the internet boom than a staid port in a storm. Up $85, down a slug, up $40. Maybe its the deleveraging thing. Investors forced to liquidate to pay off debts…even gold is not immune from the downforce. Then maybe it’s not such an “uncorrelated” asset these days. I seem to remember seeing something empirical to suggest this a while back…but can you find these things when you really want them, eh?

Time was you had to shell out for kruggerands or bullion itself then pay someone to hold the yellow lump somewhere safe - or invest in a chunky safe at home and an alarm system that was a little more than just a box on a wall. Still it was worthwhile in times gone by as war beckoned…or nuclear holocaust…or the Russians or whatever threat du jour happened to be prevailing at the time.

Now you can buy paper gold. Exchange-traded funds…gold certificates…online exchanges. You never have to see or touch the dense metal. It can all be done electronically at the click of a mouse fom your underground bunker with your hard hat on. This makes for quicker, easier, painless, transactions winging through cyberspace. But that’s got to be the clue. It is a tradeable asset today much like any other and not the exclusive  preserve of the gloomy hoarders of yesteryear clicking on their worrybeads and muttering ‘the end is nigh’.

I’m no tech analyst but two things strike me about gold’s chart. One, as I say, in spite of the mother of all global financial collapses, gold hasn’t yet surpassed its March $1,000+ high. And two, is I seem to remember Moose, a City chartie I used to know, telling me about ’double tops’ being bearish signals. This seems to hold for most currencies save the Indian rupee where it looks like a triple top…even more bearish as I understand. Anyway, have a look for yourelf and come to you own conclusion. If you know more than Joe Hack here on the subject I’d be interested on your thoughts to my simplistic read.   

http://www.research.gold.org/prices/daily/

So, if gold can’t achieve a new high when not only financial institutions but whole countries are going bust - Iceland, now a Russian satellite? - asset prices are being flattened wholesale, volatility is off the charts, confidence in the system is shot and even Sky News is running 3-month bloody LIBOR on a ticker across the screen…what will it take?!

So that’s what I don’t understand…and maybe its because gold just isn’t as uncorrelated as it once was. Maybe today it’s just another “asset class” which bobs up and down pretty much on cue with the rest of the equity, property firmament. And maybe when we’re reading that “the gold refineries cannot produce enough bars” to meet ”unprecedented” demand for bullion, it’s a telling us word is out. It’s time to sell. A Reuters report today quotes Alan Plaughmann, head of futures and options at Saxo Bank: 

“The flight to quality into gold and possibly silver is not necessarily a valid approach to the market right now. The majority of people are favouring cash and fixed income over pretty much any other asset class out there.”

The bit missing from this comment is why? Why is it “not necessarily a valid approach”? Is this safe haven no longer as safe as it once was…is it indeed the “barbarous relic” Keynes dismissively said it was. Is this the top for gold? As good as it gets? I don’t know and am not brave - or stupid - enough to guess. So, que pasa, gold? Why is your price indicating you are less afraid of the future than the sum of the world’s investors?