Gold has been the ‘talk of the town’ that it is time to move cash into gold because it is a safe haven asset class, because it is liquid, because the price is moving upwards.
It is a known fact that gold is a safe haven asset class; however, it has also been the most boring asset class with prices staying ‘flat-line’ like the plains of the Sahara desert for the past 20 years prior to the last three years. It cannot also be said unequivocally that it is a safe haven asset class because had we invested in gold for the past 20 years, we would have lost part of our principal. Why?
As you may well remember, during the Afghanistan War in 1980, the price of gold went from US250/- per oz to US$850/- per oz. Most investors would have bought gold during the third or fourth wave which would be an average of about US$600/- per oz. For the next 20 years, gold languished in the US$350/- + range. The investor would have lost partial principal and we have not included inflation over the last 20 years. So do we really think that gold is a safe haven asset??????? The following chart is illuminating!
The only safe haven asset class in the current financial crisis and economic crisis is time deposit in domestic currency or foreign currencies. This is the only asset class that is truly safe.
You will recall we qualified the last three years and it is for good reasons. Most banks were calling to buy gold starting from 2H 2007, now let’s look at the price chart in 2007 depicted below: -
Again, most investors would probably begin buying during the third or fourth wave, which would put us in 2008. Let’s have a look at the price chart in 2008 depicted below. As you can see, it was near impossible to decide at which level to enter in 2008……….it was like a roller coater ride.
In hindsight, gold today at US$930/-, an investor would have made some capital gains at most levels in 2008, except for the US$1,030/- level.
In the continuing financial crisis saga and the start of the economic crisis, we need to ask ourselves whether our investment strategy should be wealth preservation or wealth creation. Is this the time to think about making more money or is it the time to defend and preserve what we have? After all, if the whole world is in a recession, there is ample time to pick up equities at bargain basement prices for the big run up. However, it is not time yet!
Why did gold prices rise in the last three years when the ensuing 20 years prior it was just ‘dead’?
We would like to share with you the reasons behind why gold prices have been moving upwards in the past three years: -
1. The commodity bull-run cycle – it is no coincidence that the price of gold started to move simultaneously with base metals and food prices. The phenomenal growth of China with high double-digit GDP numbers sucked up everything the world had to offer; steel, oil, metals, gold……..etc.
2. Leverage - it provided the worlds’ traders and speculators with vast amount of monies to speculate on commodities and gold was not spared.
3. Financial crisis - lost of confidence in the banks, encouraged investors to shift monies away from banks and into gold.
4. Economic crisis - lost of confidence in the equity and bond markets and investors shifted monies away from these asset classes into gold.
5. Traditional buying - yes, numerous people still believe in the safe haven status of gold and in the current financial and economic mess, certainly some will be motivated to move into gold.
Of the 5 reasons, only three are relevant today; 3,4, & 5. The commodity bull-run cycle is over with the China’s growth coming to an abrupt stop. The credit crunch plus the financial crisis has clearly robbed the speculators of leverage and hence, the high volatility in gold prices seen in 2008 will probably not be seen again.
If the economic crisis is the reason why investors are moving from other asset classes to gold because of its ‘safe haven’ status then why, did it not happen in the last 9 downturns between 1975 and the present????
Of course, let’s not forget 1980 when gold shot up to US$850/-, but that was because of the Afghanistan War, then again, every other war after that didn’t motivate gold to move upwards.
We believe gold continues to be at current levels and may well move up to US$1,100/- because of ‘FEAR’, the loss of confidence in the banking sector, the loss of confidence in bankers, fund managers, regulators and politicians. Gold is something we can see and touch, it glows, and it gives us comfort in the current unprecedented times of disorder and disbelief.
Let’s take a moment to acknowledge RISK. After all, risk is what determines whether we make capital gains or make losses, worse lose principal.
We are entering the fifth wave of the gold cycle which means that the top of US$1,100/- is near. Let’s not forget in 1980 when gold hit a high of US$850/- and when it retraced, it went all the day down to US$300/-. We believe the retracement of gold in this cycle will take it down to US$550/-. Do we want to enter at the current level of US$930/- to chase for US$1,100/- when the downside risk is US$550/-, you be the judge of weighing the risk against the rewards.
Once again, we re-iterate the current turbulent and uncertain times require us to adopt a defensive strategy which mean capital preservation mode. We should not be thinking about trying to make capital gains, the risk does not commensurate with the potential returns.
Cash is KING, placing one’s monies in time deposits either in one’s domestic currency or foreign currencies is probably the most appropriate defensive and capital preservation strategy at this time.
When we are at the trough of the recession, when everything is ‘cheap’ relative to value, when the potential rewards outweigh the risks, then, we can begin to deploy cash into real estate and into equities and enjoy the potential 3 to 4 fold potential upside.
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