Rea­sons for the fear­ful to be fear­ful of gold

The Pak Banker - - OPINION - Matthew A. Win­kler

THE stock mar­ket's dread­ful Jan­uary co­in­cides with a cho­rus of­pre­dic­tions that the fall of gold has reached bot­tom from its lofty peak in 2011. Gold is the in­vest­ment of the fear­ful, and there's fear of just about ev­ery­thing from re­ces­sion to ter­ror­ism. In­deed, gold ral­lied 6.3 per­cent dur­ing the past six weeks. On ca­sual in­spec­tion, it's easy to con­clude that the price of gold has nowhere to go but up af­ter a four-year slide to $1,045 an ounce in De­cem­ber from a record $1,923 -- a 46 per­cent de­cline mea­sured by fu­tures con­tracts. Look harder. Gold has fallen much faster and a lot fur­ther be­fore. Be­tween Jan­uary 1980 and June 1982, for ex­am­ple, the pre­cious metal lost 66 per­cent of its value, drop­ping to $298 from $873. That made sense. The gold price had been driven up by fear­some in­fla­tion, which soared to 14.8 per­cent be­fore re­ced­ing to 2.5 per­cent by July, 1983. The yield on the 10-year Trea­sury note, a re­flec­tion of the Fed­eral Re­serve's de­ter­mi­na­tion to shore up fi­nan­cial as­sets, reached 16 per­cent. As th­ese rates fell back to earth, so did gold. In­fla­tion to­day is barely vis­i­ble at 0.7 per­cent.

Novem­ber 1981 marked the be­gin­ning of a rapid ex­pan­sion of glob­al­iza­tion, co­or­di­nated mon­e­tary au­thor­i­ties and ro­bust bull mar­kets in bonds and stocks. Dur­ing the last two decades of the 20th cen­tury, the re­turns on th­ese in­vest­ments were over­whelm­ing -- the Stan­dard & Poor's 500 In­dex ap­pre­ci­ated 1,099 per­cent while U.S. Trea­sury bonds reaped an av­er­age 432 per­cent from in­come and price gains. They proved just as hardy in the 21st, when the S&P 500 and Trea­suries climbed 76 per­cent and 126 per­cent. That was de­spite un­prece­dented spec­u­la­tion in res­i­den­tial and com­mer­cial real es­tate, the en­su­ing eco­nomic cri­sis and worst re­ces­sion since the Great De­pres­sion that ush­ered in gold's re­bound un­til gov­ern­ments and mon­e­tary au­thor­i­ties re­stored con­fi­dence. While gold ral­lied for sev­eral years into the hous­ing bust and fi­nan­cial cri­sis, it failed to match the re­turns of stocks or bonds in the sub­se­quent ex­pan­sion. Now China's slow­down has stoked enough anx­i­ety to bur­nish gold's ap­peal. Among 24 traders and an­a­lysts sur­veyed by Bloomberg News, 17 are bullish on gold. A hand­ful of global in­vestors pre­dict the end of U.S. growth and a stock mar­ket crash sim­i­lar to the 2008 disas­ter. The world's largest gold ex­change traded fund, SPDR Gold Shares, saw a 3.8 per­cent in­flow in­crease dur­ing the past four weeks af­ter $2 bil­lion of out­flows in 2015, or 7.6 per­cent of its to­tal mar­ket cap­i­tal­iza­tion. Amid the cur­rent gloom, though, fi­nan­cial as­sets show no signs of los­ing their ad­van­tage. That's be­cause they are un­der­pinned by an econ­omy that shows none of the weak­nesses that prompted the last re­ces­sion or any of the pre­ced­ing ones.

Lev­er­age in credit is a mere shadow of what it was seven years ago. Cor­po­rate debt ra­tios among the big­gest and small­est com­pa­nies in the Rus­sell 3000 are now near 30-year lows. U.S. homes are at their high­est val­u­a­tions since Oc­to­ber 2007, while house prices climbed for 10 con­sec­u­tive months, the long­est streak since 2006. At the same time, the sup­ply of houses re­mains near an all-time low, ac­cord­ing to data com­piled by Bloomberg. The be­lated re­cov­ery of U.S. home­own­ers means they are feel­ing more con­fi­dent. Mean­while the rest of the U.S. econ­omy is on the verge of full em­ploy­ment, which helps ex­plain why the Fed­eral Re­serve de­cided last month to raise in­ter­est rates for the first time since 2006. The Fed's re­la­tion­ship with global in­vestors is stronger than at any point in the past three decades as mea­sured by the sta­bil­ity of fi­nan­cial as­sets. In the $13 tril­lion mar­ket for U.S. govern­ment debt, the av­er­age volatil­ity of U.S. Trea­sury bonds has fallen 25 per­cent since Janet Yellen took the chair from Ben Ber­nanke at the Fed, and is 69 per­cent of what it was un­der Alan Greenspan, ac­cord­ing to data com­piled by Bloomberg. For gold en­thu­si­asts, th­ese aren't en­cour­ag­ing signs. The price of gold and the yield on the bench­mark 10-year Trea­sury bond have con­sis­tently moved in op­po­site di­rec­tions since 2005 and the trend is ac­cel­er­at­ing, ac­cord­ing to data com­piled by Bloomberg. That's the surest in­di­ca­tion of the gold mar­ket cow­er­ing be­fore the Trea­sury mar­ket and bow­ing to the au­thor­ity of the cen­tral bank when it comes to fight­ing in­fla­tion.

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