Apocalypse postponed - gold bugs please note!

10 November 2009 | 05:11 Code : 19636 Geoscience events
An unforeseen bonus of being five months pregnant this fall is that I can go as....

An unforeseen bonus of being five months pregnant this fall is that I can go as "inflation" for Halloween with very little costume-making effort. Those of you without swollen feet, however, might have to get slightly more creative, particularly since dressing up as inflation this year is roughly as relevant to real-world events as dressing up as a svelte, successful Britney Spears last year. It’s pessimistically wishful thinking, and you’re going to need a lot of makeup.The reason the "I" word continues to be such a predominant topic of conversation, of course, despite the fact that every inflation indicator from bond yields to consumer expectations remains steadfastly on the opposite end of the spectrum, is because gold is consistently climbing, rising about 50% over the past year. And true to manic-depressive gold-bug form, we certainly cannot accept an encouraging gold price as a sign of anything other than apocalypse.The poor belabored 1970’s and 1980’s are of course trotted out once more to examine our current state of hypothetical doom, as many point to the surges in gold price of that era and the runaway inflation that followed.  Rapidly doubling gold prices proved harbingers of 15% CPI inflation, thus providing the natural resource sector with yet another Alamo (as if we needed another one-looking at you, Bre-X).So naturally, the normally encouraging image of an upward-trending chart sends an embarrassing proportion of us into some sort of PTSD flashback, complete with warnings to abandon the greenback for value-holding objects-because that did the inflation-hedging art collectors of the late 1970’s so much good.  I mean, who do you know who didn’t protect their fortune with Photorealism and Neo-expressionistic sculpture?Before we accept such a fate, let’s note the difference between the Four Horsemen of the Apocalypse pre-inflation stampede of 1979 and the current year’s chart that it is so often and so unfairly compared to:The key difference between previous gold price surges that have preceded inflation and the current charts is not the numerical price but its pattern. We have seen time and again that rapid, violent upswings mean nothing good-we were reminded quite clearly of this last October, when gold ran to nearly $950 and then plunged back to $720 within the short space of 30 days. And so it is little wonder that 1979’s chart sent investors running from equities to art dealers.In the current year, however, we see not a mad dash but a gradual-and, all things considered, modest-increase. We cannot model our predictions after those of the 1970’s and 1980’s because the pattern is not the same. Investors hedging against inflation and seeking risk aversion have little effect on the present trend in gold price, if they even represent a significant proportion of investors at all; indeed, if risk aversion were an overarching theme, equities prices would not be increasing as they are, nor would stock market volatility as a whole be decreasing.Cast out to sea without such trusty historical patterns to cling to, then, what must we conclude? The gold price’s subtle message is twofold; first, after years of overhyped hot-air promotion and regulatory skirmishes, the sector has seen a quiet renovation from the ground up. Junior explorers and major producers alike are seeing a return to the simple formula of strategic acquisition and systematic development, with overblown, unfocused resource portfolios becoming a dying trend. A stronger foundation will always affect the entire structure, regardless of the shifting effects of speculation.Secondly, and perhaps partially as a result, central banks, which in recent years have largely been reducing gold holdings, are now making efforts to diversify their reserves and as such are increasing holdings of gold. Whether this indicates a loss of confidence in the dollar or a renewed confidence in gold (and the reality almost certainly lies somewhere in the middle), such movements will continue to bolster the gold price not only steadily, but sustainably.But of course, one could always turn to 1970’s art dealers instead. That would certainly make for a more interesting costume. 

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