All that glitters aint gold

Gold has seen a lot of attention over the last four years as an asset class for investors. The reasons for this I believe are mainly physcological and feel that gold has had its day in the sun. The pick-up in housing in the US should in theory lead to devaluing of gold in my very humble opinion.

If you purchase gold not in jewellery format, for simplicity you are doing for generally one of the following reasons:

Hedge against inflation: traditionally “HARD ASSETS” are the best hedge to inflation. Precious metals such as gold, silver, diamonds are thought to hold their value and appreciate versus inflation. Gold trades with an inverse relationship to the dollar so if the dollar gets weaker gold gets stronger. The US federal reserve has flooded the market with dollars over the last four years causing on overall increase in the supply side of dollars and therefore investors flocked to gold as a protector against the inflationary aspects of QE on their wealth.

Safe haven: Gold is seen by many over the centuries as a safe haven, i.e when all else fails gold will always be in demand. To me this illogical as if the brown stuff really hit the fan, what use is it to be long gold when really you want to long food and water. You could say you can exchange the gold for food and water but rationally who would want your gold when they have food and water. This is the Warren Buffet approach to gold, he feels it is a useless precious metal that “does” nothing for you.

The really big funds of this world got involved in gold at the right time about 4 years ago as a reaction to the sub-prime crisis in America. The smart guys in the room foresaw most of the policy responses in terms of bailouts, money printing etc that has gone on over the last few years and knew that this would drive gold higher. They have done well as gold has been as much as 174% higher since the lows of 2008 and currently about 150% higher. In the meanwhile the not so smart money has been following into this trade all the while pushing things higher and higher until we have reached a point now where I believe the bubble should burst relatively soon. I hesitate to call it a bubble but when I see things like gold coin machines in supermarkets, and “cash for gold” shops appearing on high streets it usually sends alarm bells ringing. Think of the amount of mortgage brokers, estate agents, bank branches you saw on your high street leading up to the credit crunch.

The reason for this is that gold is not the only protector against inflation out there. Housing and property also is. The US is seeing a turnaround or bottoming out of their housing market after a pretty painful four years. So this should in turn signal to the smart money brigade to start switching their money from the out performer : gold into the under performer : housing. None of this is going to happen today but I think over the next few months you should start to see the evidence forming of a rotation out of gold into the housing related sectors, be they mortgage lenders, house builders, contractors, equipment makers etc. Much more diverse range of opportunities to invest in as well to take advantage of a pick-up in housing rather than having a lot of your eggs in one basket even if it is made of gold.

This will also take a while to play out as Europe is not quite there yet in terms of reaching a bottom for their housing market and still feeling the effects of a burst property bubble in certain peripheral nations that still has legs to the downside. But there is nothing to say Europeans cant invest in the US market.

Attached is a graph of building permits granted in the US.


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