How Did Goldbugs Get It So Wrong Again In 2015?

After more than four years of falling gold prices even the most ardent goldbug is beginning to scratch his head and have moments of disbelief. Why did gold fall around 10 per cent to date in 2015, the US dollar rise by about the same amount, and US stocks go basically sideways?

Well the crowd got it right. This time last year Bloomberg summed up their reasoning: ‘A collapse in oil prices is curbing demand for the metal as an inflation hedge, while the Federal Reserve is moving closer to raising interest rates. Gains for the dollar and US equities have also made gold less attractive as an alternative asset.’

Oil prices

Oil prices kept on falling, and touched a new bottom only last week. The Fed procrastinated and stalled but then finally did move interest rates higher this month. The dollar continued to prove attractive as yields on treasury bonds of circa 2.2-2.3 per cent look much better than negative or near negative yields on the euro or yen. 

That said gold’s zero yield did outperform those negative bond yields, and euro and yen investors again learnt how gold preserves the value of your currency better than the money printing European Central Bank and Bank of Japan. 

This year even the People’s Bank of China joined in with its surprise devaluation in August and subsequent moves taking the yuan down about six per cent. Again the lesson to savers in the world’s largest producer and consumer of gold about how to preserve wealth against a devaluing central bank is only too clear. 

Perhaps what goldbugs like myself really misjudged in 2015 was the strength of the US stock market rally. It did not seem to matter that USA Inc. posted four quarters of lower sales and three quarters of falling profits, or at least the major indices did not show it.

No stock market crash

What actually happened to share prices was rather different. Around two-thirds of stocks fell to bear market levels. But the money flowed into a small number of high-value companies and that kept the indexes steady, give or take the odd sell-off. 

It remains the case that as Tocqueville Gold’s John Hathaway eloquently explained in a long letter recently that for gold prices to really catch fire there has to be a financial crisis and stock market crash of some kind. 

Even that could come with a nasty sting in the tail. In the 2008-9 crash the initial stages saw gold and silver sold off with everything else in a serious correction, and the US dollar rallied strongly as it usually does when shares are converted into greenbacks pushing up demand for the same. 

Of course, we don’t know whether such recent history would be automatically repeated in another crash. Gold and silver have both undergone substantial price corrections over the past four years and in the Global Financial Crisis they were both coming off multi-year highs. Those patiently waiting for $950 an ounce before going for gold might be left barking up the wrong tree. 

Gold on the ropes

Still US stock markets did not drop like a stone in 2015, and that did not give gold prices a chance to shine again in the aftermath of a crash. And let’s not forget that gold tripled and silver was up seven-fold from those sell-off bottoms of the Global Financial Crisis. These were by far the best asset classes to hold for the first two years of the recovery from that Apocalypse. Will it be any different this time around? 

If anything the rise in US stock markets has been so spectacular, and totally down to discounting ultra-cheap interest rates that the downside should be much larger, and consequently the scope for increases in gold and silver prices several fold larger. But of course we still have to get there first. 

Could a goldbug therefore make the same error of judgement in 2016 as we all made in 2015? Have we just become so addicted to an argument that we are now guilty of not giving up in the face of overwhelming evidence that we have gotten gold wrong?

No because we have not really, have we? Gold is not back around $300 an ounce. It has not collapsed in price like oil or iron ore. The price chart for gold, and silver for that matter, still shows a correction after a major price advance. 

True this has now gone on for rather a long time but it has not broken down. Indeed, a 50 per cent price retracement on any commodity price that had moved up as smoothly as gold is typical before it goes into a final parabolic or blow-off phase.

Jim Rogers

The author of ‘Hot Commodities’ - who got there first in seeing commodities as the great buy of the 2000s - Jim Rogers, is perfectly convinced that this is exactly what we are experiencing in the gold price chart. He would love to buy more gold at half its $1,923 an ounce high but others argue that a 50 per cent retracement from the lows of the early 2000s is all that is required, and that was the $1,050 bottom that we saw this month. 

If this is so why are we worrying about perhaps having to wait another year for such a spectacular endgame for the precious metals? I suppose none of us is getting any younger and waiting for any investment to finally pay off is hard on your patience. 

Warren Buffett’s even older partner Charlie Munger says patience is often the hardest part in getting any investment right. That’s not to say gold and silver investors will all end up as very old multi-billionaires like these distinguished gentlemen. 

But let us all hope that 2016 is a far less frustrating year than 2015 with some nice surprises for precious metal investors along the way. After all the year did end with the Federal Reserve finally removing the punch bowl from the Wall Street party!

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Peter Cooper

Business & Travel Freelance Journalist
The Business Centre
Dubai Media City
Dubai, United Arab Emirates