I attended an investment conference in London on Friday, one of the key themes was precious metals, in particular gold.
As we all know, gold is in a secular bull market at the moment and the outlook is positive for it whether we get deflation or inflation. Deflation will likely be driven by a lack of available credit in the economy because banks may not want to lend to each other as they wouldn’t be able to afford a loan default. If this climate of fear were to materialise again, gold would be an invaluable store of wealth when the banks couldn’t be trusted to look after your money. Likewise, gold is a hold during inflationary times caused by excessive money printing by Western Economies. The thinking is that gold is not in a bubble yet because it is not heavily owned- the average institutional fund has less than 1% of its holdings in the metal.
The big question remains though, when should we be selling our gold, well…I’ll discuss a few key indicators we can look at:
1. Ratio of the Dow Jones Industrial Index (DJIA) to $ gold price
At the moment this ratio sits around 8. Historically the DJIA:Gold ratio when the gold price has topped is between 1 and 2. Therefore a reasonable target is 2.
2. Gold and UK Houses
Back in 2005 the average UK house could be purchased using 720 troy ounzes of gold. At the present price of $1,500 this number is 177 ounzes. In the 1980′s when gold last topped out the average house could be purchased for around 50 ounzes. Therefore a reasonable target is 100 ounzes of gold for the average UK house.
3. Bank base rates
At present there is very little opportunity cost of holding gold, since keeping your money in the bank will provide a return less than inflation. Gold will become less attractive once banks start providing a real return on your savings. Another sensible indicator is therefore when interest rates are around the 2/3% mark in real terms.
So this provides some indicators for when is a good time for selling gold, which as you can see are all a long way off!
As an aside I was told about a useful ETF called NYSE:GDXJ, this provides exposure to the top 20 junior gold miners and serves as a simple way of getting access to the junior miners without having to do hours of research on each one. It seems the most efficient way to invest gold is either through the metal itself, bullion and etf’s (LON:PHAU as an example) or through the junior miners. Hope this is useful information.