When is gold a sell

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.



Inflation vs Deflation

This is the hot debate in the investment community.

Deflation would favour fixed income investments and cash. Inflation would favour commodities, precious metals and resource related stocks.

For the UK I think inflation will be the problem. Our deficit as a % of GDP is one of the highest in the world, and even if the Conservative government push through all these spending cuts our deficit as a % of GDP will still be on a very unsustainable path. For the Eurozone I think deflation will be more of a problem because of the lack of any quantitative easing and the Eurozone’s inflexible exchange rate.

Compared to the size of our money supply the UK’s quantitative easing program was massive, larger than that of the US in relative terms. This only spells one thing, inflation.

There are few options remaining in order to solve this mess for the UK- we could default on our debt, we could inflate our debt away or we could depreciate our currency so that our debt commitments are worth less to foreign holders. I think we will see a combination of inflation along with a depreciating currency which means we will be importing inflation too!

To protect yourself from weakening sterling it would be wise to put some money in strong currencies- these include Norwegian Krone, Swiss Francs and the Australian Dollar. Exposure could be gained through foreign currency denominated accounts with high street banks, ETF’s, foreign denominated assets or simply holding foreign cash.


Gold and Silver

Everyone is talking about gold and silver at the moment, and whether or not they are in a bubble.

Ultimately people invest in precious metals as protection against inflation, protection against fiat currencies and protection from the government. At the moment it appears there is still a long way for the bull market to run as the markets have not gone parabolic.

Silver has had a brilliant run, reaching $49.50 per troy ounce at the end of April. I think there will be some consolidation around this price as silver has had a brilliant run, it however remains a hold for the long term.

If you want to invest in precious metals take a look at buying shares in LON:PHAU and LON:PHAG. These ETFs are backed by physical metals so they will closely match the value of the underlying metal. Remember they are denominated in USD though, so you may be exposing yourself to currency risk depending on what currency your liabilities sit in.

I will talk about owning precious metals in the form of bullion/ coins in a later post.