Gold

James Mackintosh

Shocking news from Bloomberg for goldbugs (as if they weren’t hurting enough):

Gold dropped 23 percent this quarter, heading for its biggest loss since at least 1920 

James Mackintosh

Amid the post-Bernanke rubble, there are probably a few people sparing time from hedging their interest rate risk to look for bargains.

Look no further: the gold miners are cheap! I mean, really cheap. Gold has tumbled a long way from its peak, but miners have fallen much further – and are now trading at an extraordinarily low multiple of the gold price. This chart shows the ratio of the Market Vectors Junior Gold Miners index of small miners, and of the Arca Gold Bugs index of larger miners, to the gold price.

Miners and gold

Larger miners are now the cheapest relative to gold they’ve been since the aftermath of the dotcom bubble, when they proved a serious bargain. The index of junior miners only started in 2004, but their prices are testing the low relative to gold reached after Lehman Brothers collapsed – after which they offered some of the best returns of any stocks anywhere. 

James Mackintosh

As the month draws to a close, the old “sell in May” strategy failed miserably for equity investors – except in Japan and emerging markets.

There are a couple of lessons from this May, but first here’s what the major assets did during May, first in local currency then in dollar terms:

Total return month to date local currency

Total return month to date dollars

Since the US is still open, both charts are up to the close of the 30th, for consistency, so not quite the full month; European markets today were down about 1 per cent, and Japan up just over 1 per cent, but the broad patterns remain the same. 

James Mackintosh

Spandau Ballet’s 1983 anthem Gold could be the national anthem for the world’s inflationistas.

Always believe in your soul
You’ve got the power to know
You’re indestructible
Always believe in, because you are
Gold! GOLD 

James Mackintosh

The most profitable way to be wrong over the past five years was to bet that frantic printing of money by central banks would create inflation – so buy gold. Since the start of 2007 gold has risen at an annualised 19 per cent, a tasty return, particularly when compared to equities.

Yet, there’s been no sign of consumer price inflation, even as the US Federal Reserve explicitly targets asset price inflation (Fed jargon calls this the “portfolio channel” for monetary transmission of quantitative easing; in English that translates as rigging the market). 

James Mackintosh

The argument for gold is very simple: it is hard money at a time when every other major currency is being watered down by central bank money printing.

On that basis, Europeans should have been panic-buying gold this summer as the European Central Bank prepared its plan to hoover up peripheral country bonds (although it will try to “sterilise” the plan, taking in deposits in some form to keep net money issuance stable, even as its balance sheet expands). 

James Mackintosh

My colleague Gillian Tett wrote a nice column today on talk of using the gold reserves of struggling European countries to help lower their financing costs.

She highlights a suggestion from the Gold Council, the miners’ marketing group, that European countries could issue bonds backed by their holdings of gold