Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Gold bars are displayed at the headquarters of Mitsubishi Materials Corp. in Tokyo. (Toru Hanai/REUTERS)
Gold bars are displayed at the headquarters of Mitsubishi Materials Corp. in Tokyo. (Toru Hanai/REUTERS)

Metals

Could gold solve all of the economy's problems? Add to ...

Historian and portfolio manager Don Coxe was in fine fettle on BNN recently when he mused that two of the strongest investments over the past couple of years date back to the time of Moses: grain and gold. So much for technology.

Mr. Coxe has gained a considerable following for his untiring enthusiasm for commodities, especially gold, oil and agricultural stocks. Recently, he has tilted more in favour of agricultural stocks. Over the summer, he launched the Coxe Global Agribusiness Income Fund to complement his earlier closed-end offering, the Coxe Commodity Strategy Fund.

More related to this story

Mr. Coxe’s early career as a historian has given him considerable foresight – big thoughts that go well beyond the next move in the commodities markets. So listen up, traders. Rather than letting bullion kick dust in the eyes of the greenback and the euro, U.S. President Barack Obama and his European counterparts could “do a Roosevelt,” he says. Mr. Obama should grab gold by the ear and cap it, say, at $2,000 (U.S.) an ounce, Mr. Coxe argues. “They could declare themselves willing sellers at that price in bars or bonds backed by gold.” He based that number on a market price for gold of $1,800 an ounce.

The U.S. Treasury could then issue gold-backed bonds, perhaps convertible into gold bullion over their 20-year life. Other countries wouldn’t rush to snap up gold because no one wants their currency to strengthen, he says. The well-known strategist put the idea forth in the September issue of his Basic Points newsletter, distributed by the Bank of Montreal.

Was it merely an intellectual exercise?

“It’s a very serious proposal,” he said. “We’re heading into a worse financial crisis than the last one [in 2008] The fact that no one has proposed it is an illustration of the tremendous success of economic schools [based on the teachings of John Maynard Keynes]that say gold is irrelevant.”

Such a move would have a historical precedent – in 1933, to be exact, at the depths of the Great Depression. That’s the year U.S. President Franklin Delano Roosevelt – in an attempt to re-inflate an economy caught in a deflationary spiral – revalued gold bullion from $20.67 an ounce to $35, declaring the United States government would be a buyer and seller at that price.

Mr. Roosevelt also made it illegal for American citizens to own gold, although Mr. Coxe is silent on that aspect. The Bretton Woods Agreement made the $35 price worldwide in 1944. The United States ended the convertibility of the greenback into gold in 1971, unleashing a 40-year bull market, Mr. Coxe said.

It would be an elegant solution. Mr. Obama could cap the gold price by presidential directive so the move wouldn’t have to go before Congress, he says. Republicans would be reluctant to criticize it on principle because the President would merely be bowing to market forces.

While a move to cap the bullion price would spoil the speculators’ party, it would give gold investors a graceful exit, cheer miners, whose stocks would soar, and relieve the debt problems burdening the United States and Europe, albeit temporarily. It would also give policy makers some breathing room.

“Mr. Obama could say, ‘Now let’s talk long term,’” Mr. Coxe said.

Fixing the gold price would resolve Europe’s sovereign debt impasse because severely indebted countries could issue bonds backed by their gold holdings. Italy, for example, has 2,452 tonnes of gold sitting in its vaults; Spain has 280 and Greece has about 110. Rather than indebted countries going to Germany, cap-in-hand, asking for a blank cheque, Mr. Coxe hopes “some of the Germans will take up the suggestion and say, ‘Hey, these countries have gold.’”

The upward revaluation of gold would allow some of the better-endowed PIIGS (Portugal, Italy, Ireland, Greece and Spain) to issue gold-backed bonds at minuscule interest rates, Mr. Coxe argues. Italy will be rolling over $300-billion worth of bonds in the near future. “If it could issue bonds convertible over the long-term into gold, it could immediately extend the duration of the national debt,” he said in the interview. Such bonds might even be attractive to pension funds because they would have an inflation hedge built in.

Even without a cap on bullion, a growing number of market watchers believe shares in gold mining companies will outperform bullion over the next year or so. Gold mining shares are attractive relative to bullion because they have not kept pace with gold’s rise.

Levente Mady, managing director of derivatives at Union Securities Ltd. in Vancouver, said that while gold’s long-term fundamentals are good, it could fall to $1,500 or “maybe lower” over the next month or two. At $1,650, bullion is down about 10 per cent from its record high. Investors who want to protect their core holdings can do one of three things, Mr. Mady said. They could sell futures contracts against their holdings, buy some insurance in the form of put options, or “if you have the gold under your pillow, sell call options on it” – an especially popular strategy right now, even among gold mining companies.

Ross Clark, in a recent ChartWorks bulletin, said gold and silver are nearing the end of a consolidation phase after falling from their spring highs. Mr. Clark is an investment adviser with CIBC Wood Gundy in Vancouver who specializes in technical analysis. Short term, he figures gold could slump to the $1,500 to $1,550 area, laying the ground for the next phase of the bull market. After that, “the market should be capable of an upside breakout,” Mr. Clark said. To signal a breakout, gold would have to rally to $1,850 or more. “If markets try to rally and fail, they will fail badly.”

Mr. Coxe, for his part, acknowledges that policy makers and central bankers will likely prove too dogmatic to heed his suggestion. Why?

“Because they fear that if they do something about issuing gold-backed bonds, they’d be letting gold come back into the monetary system,” he said. “It would be like the Catholic Church saying, ‘On mature reflection, we’re not sure God exists.’”

Follow us on Twitter: @GlobeInvestor

 

Topics:

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories