Opinion: Gold won’t have been tested until the crap really hits the fan http://www.marketwatch.com/story/gold-wont-have-been-tested-until-the-crap-really-hits-the-fan-2015-08-05?page=2
Nothing too awful has happened yet in Greece, China, Ukraine
The
euro is about to fall apart. The Chinese stock market is crashing,
taking the economy down with it. The emerging markets are disappearing
down a plug hole as commodity prices collapse. And what happens to gold?
The ultimate safe haven, the one asset that is meant to provide a
refuge in even the worst of storms, enters a bear market as well.
Plenty of people have concluded that gold is finished. Use it to make some nice jewelry, but don’t expect it to have any place in a well-managed portfolio. If it doesn’t show so much as a flicker of life during that kind of turmoil, then you might as well forget about it.
But hold on. There is a flaw in that view.
By any historical standards, we haven’t any real crisis yet. In reality, the markets are going through a period of remarkable, and possibly unnatural, calm. Perhaps it is true that gold is no longer a reliable a store of value. Maybe bitcoin, land, or indeed cash, have taken over the as natural refuge in times of turmoil.
But it is far too early to conclude that — let’s wait until something really bad happens.
It has certainly been a dismal few years for gold investors. After hitting all-time highs of close on $2,000 an ounce at the peak of the financial crisis, the price of gold GCZ5, +0.28% has been in relentless decline over the last four years. In the last month, the price has dipped below $1,100, and keeps on going down. The gold miners GDX, +0.22% are in even worse shape, with many operations no longer profitable at these depressed prices.
That in itself might not be so bad. Every asset market goes up and down, and there is no reason to expect gold to be any different. The trouble is, gold is meant to go up when there is panic in the markets — not down. That calls into question whether it is still a safe haven — and if it isn’t there really isn’t much point to it.
Take Greece, for example. As the country teetered on the edge of a dramatic exit from the eurozone last month, a fresh financial crisis looked imminent. No one really knows what happens when a country tumbles out of the euro EURUSD, +0.3753% , or what kind of losses might be triggered right across the financial system if the country defaulted on its debts. And yet, through that whole saga, the gold price was about as lively as a Tuesday afternoon at an old people’s home.
Or take China. The stock market for what will soon be the biggest economy in the world soars in a frenzy of speculative buying, then collapses back into an equally dramatic bear market, losing a third of its value in the space of a couple of weeks. What would happen to the global economy if China was engulfed in its own version of the credit crunch? No one can say for certain, but it does not sound good.
And gold? You’d find more life in the cemetery.
It gets worse. Syria has descended into civil war. Russia has effectively invaded the Ukraine. Islamic State has taken over swathes of Iraq. None of those events did anything for the gold price either. It is easy to see why some analysts are starting to conclude that it is not a safe haven anymore.
But hold on. There may be some truth in that, and certainly no one should rule it out. But it is equally possible that the gold market is quiet because the world is as well.
Greece? As it turned out, there was never that much chance of it tumbling out of the eurozone. The Finance Ministry had put together a Plan B, but it was about as coherent as a Donald Trump policy speech, and so long as there was no serious preparation in place for a return to the drachma then the country was always likely to knuckle down to whatever fresh austerity measures its European Union partners had in store for it.
The crisis never spread to Portugal or Italy, or anywhere else for that matter. In financial terms, it was a nonevent.
How about China? Sure, the market is down a lot, and there will be some small investors in Shanghai nursing heavy losses. The Shanghai index SHCOMP, +2.26% is down from close on 5,000 to 3,700. Then again, a year ago it was at 2,000. Anyone whose trading horizons stretch for more an a couple of month are still going to be sitting on some very handsome profits.
Volatility in what is effectively an emerging market is nothing very unusual. If the index crashed to 1,000 and stayed there, that might be a problem. Until then, not much has happened.
Nor do any of the other events that have dominated the news. Syria may be tragedy, and Islamic State a menace, but economically neither count for anything. Neither does the Ukraine, and even sanctions against Russia don’t matter much to anyone apart from Polish farmers and German car manufacturers.
In fact, by any historical standards, the world is remarkably calm, and so are the markets.
Only a few localized wars disturb the peace, and all the major bourses are trading in a narrow range. Central banks are maintaining rates close to zero, with only microscopic rises in interest rates planned. Inflation has vanished, but deflation hasn’t really taken hold. Growth has resumed, but only modestly. A more placid outlook would be hard to imagine.
So what would you expect gold to do in those circumstances? Drift sideways, and lose some of its value. Which is pretty much exactly what has done.
Sooner or later, there will be a genuine crisis. A revolution will topple the Saudi regime. Japan will default on its massive debts. The Chinese middle class will demand democracy. France will leave the euro.
Any of those would be huge. If the gold price did not soar on any of those events, we could conclude it was no longer a safe haven. But until something on that scale happens, it is too early to say.
Plenty of people have concluded that gold is finished. Use it to make some nice jewelry, but don’t expect it to have any place in a well-managed portfolio. If it doesn’t show so much as a flicker of life during that kind of turmoil, then you might as well forget about it.
But hold on. There is a flaw in that view.
By any historical standards, we haven’t any real crisis yet. In reality, the markets are going through a period of remarkable, and possibly unnatural, calm. Perhaps it is true that gold is no longer a reliable a store of value. Maybe bitcoin, land, or indeed cash, have taken over the as natural refuge in times of turmoil.
Saudi-Led Coalition Claims Strategic Victory in Yemen
Saudi-led forces in Yemen have defeated the country’s rebels at a strategic southern air base. It is the latest victory in a string of recent gains by the coalition, setting the stage for forces to make a further push into Houthi-controlled areas. Photo: AP.It has certainly been a dismal few years for gold investors. After hitting all-time highs of close on $2,000 an ounce at the peak of the financial crisis, the price of gold GCZ5, +0.28% has been in relentless decline over the last four years. In the last month, the price has dipped below $1,100, and keeps on going down. The gold miners GDX, +0.22% are in even worse shape, with many operations no longer profitable at these depressed prices.
That in itself might not be so bad. Every asset market goes up and down, and there is no reason to expect gold to be any different. The trouble is, gold is meant to go up when there is panic in the markets — not down. That calls into question whether it is still a safe haven — and if it isn’t there really isn’t much point to it.
Take Greece, for example. As the country teetered on the edge of a dramatic exit from the eurozone last month, a fresh financial crisis looked imminent. No one really knows what happens when a country tumbles out of the euro EURUSD, +0.3753% , or what kind of losses might be triggered right across the financial system if the country defaulted on its debts. And yet, through that whole saga, the gold price was about as lively as a Tuesday afternoon at an old people’s home.
Or take China. The stock market for what will soon be the biggest economy in the world soars in a frenzy of speculative buying, then collapses back into an equally dramatic bear market, losing a third of its value in the space of a couple of weeks. What would happen to the global economy if China was engulfed in its own version of the credit crunch? No one can say for certain, but it does not sound good.
And gold? You’d find more life in the cemetery.
It gets worse. Syria has descended into civil war. Russia has effectively invaded the Ukraine. Islamic State has taken over swathes of Iraq. None of those events did anything for the gold price either. It is easy to see why some analysts are starting to conclude that it is not a safe haven anymore.
But hold on. There may be some truth in that, and certainly no one should rule it out. But it is equally possible that the gold market is quiet because the world is as well.
Greece? As it turned out, there was never that much chance of it tumbling out of the eurozone. The Finance Ministry had put together a Plan B, but it was about as coherent as a Donald Trump policy speech, and so long as there was no serious preparation in place for a return to the drachma then the country was always likely to knuckle down to whatever fresh austerity measures its European Union partners had in store for it.
The crisis never spread to Portugal or Italy, or anywhere else for that matter. In financial terms, it was a nonevent.
How about China? Sure, the market is down a lot, and there will be some small investors in Shanghai nursing heavy losses. The Shanghai index SHCOMP, +2.26% is down from close on 5,000 to 3,700. Then again, a year ago it was at 2,000. Anyone whose trading horizons stretch for more an a couple of month are still going to be sitting on some very handsome profits.
Volatility in what is effectively an emerging market is nothing very unusual. If the index crashed to 1,000 and stayed there, that might be a problem. Until then, not much has happened.
Nor do any of the other events that have dominated the news. Syria may be tragedy, and Islamic State a menace, but economically neither count for anything. Neither does the Ukraine, and even sanctions against Russia don’t matter much to anyone apart from Polish farmers and German car manufacturers.
In fact, by any historical standards, the world is remarkably calm, and so are the markets.
Only a few localized wars disturb the peace, and all the major bourses are trading in a narrow range. Central banks are maintaining rates close to zero, with only microscopic rises in interest rates planned. Inflation has vanished, but deflation hasn’t really taken hold. Growth has resumed, but only modestly. A more placid outlook would be hard to imagine.
So what would you expect gold to do in those circumstances? Drift sideways, and lose some of its value. Which is pretty much exactly what has done.
Sooner or later, there will be a genuine crisis. A revolution will topple the Saudi regime. Japan will default on its massive debts. The Chinese middle class will demand democracy. France will leave the euro.
Any of those would be huge. If the gold price did not soar on any of those events, we could conclude it was no longer a safe haven. But until something on that scale happens, it is too early to say.
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