It sounds like a plot straight out of the gold bug's handbook.
A major global currency suddenly looks shaky; a handful of European countries cling to life preservers in a sea of debt; the global recovery shows signs of sputtering; tensions across the Middle East rise; and the leaders of the free and not-so-free world can't seem to agree on anything, from major financial reform to the tricky task of unplugging cash lifelines from ailing economies.
This is the backdrop to the Great Gold Rush of 2010, which is nevertheless demolishing some long-held beliefs about the metal - namely that to thrive it needs an inflationary environment, a loss of faith in the U.S. dollar and a world full of fear.
The greenback has been anything but feeble, considering the United States' grim deficit picture, its jobless recovery and position on the wrong side of a worsening global trade imbalance. Inflation ranges from benign to non-existent, at least throughout the advanced economies. And investors seem willing to take risks again. Money has poured back into emerging market equity funds in June, hitting a 10-week high in mid-month. High-yield bond funds posted net inflows for the first time since early May and most major equity indexes more than held their own. The MSCI world stock index climbed in the last half of the month, its best showing in nearly a year. Even Spanish bonds improved.
Yet facing a world of unknowns, investors seem to want their favourite ancient wealth preserver close at hand too. Investment demand for gold has soared, fuelled by the immense popularity of exchange-traded gold funds. Another factor, some analysts suggest, is that gold is being treated more as a reserve currency these days than an inflation hedge, especially with growing doubts that the euro will survive in its present form. Which helps explain why the metal shattered records last week, climbing to $1,258.30 (U.S.) an ounce and bringing the gain so far this year to more than 15 per cent.
Needless to say, this is not the way gold has traditionally behaved, at least not at this time of year. Data going back more than a quarter of a century - admittedly, a tiny blip in gold's long trading history - shows that, like equities, the metal typically suffers through the doldrums from late spring to autumn.
That bit of news comes from veteran gold watcher Martin Murenbeeld, who has kept close tabs on monthly stats in search of seasonal patterns. His research shows that gold typically rises from October through January, before pulling back slightly, but staying in positive territory until early May.
Gold did come down somewhat in mid-May, right on seasonal cue, before taking off to new heights. But before reaching for that sell button, it's worth noting that the average decline is less than 1 per cent. Gold mining stocks, though, are another matter. "Gold equities are super-strong in September," Dr. Murenbeeld, chief economist with Dundee Wealth Economics, said the other day from his office in Victoria. "So in July, you want to start buying. … You can get a seasonal [price]swing of 5 per cent. Now that is noticeable."
Dr. Murenbeeld is not now and never has been a member of the fraternal order of gold bugs or the small subset of conspiracy theorists who like to hijack debates about the precious metal. His is the rational eye of an economist who has assiduously tracked the metal's ups and downs within the context of global financial and economic shifts for more than three decades. "I just happen to like analyzing it. It's a simple sort of weather vane on what goes on in the world. It's kind of like a currency. It's a window into a whole bunch of things about a country and even the global economy."
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Looking hard at a currency's many twists and turns over a period of years can reveal a lot about economic trends, productivity, investment behaviour, changing opinions about the future and the impact government policies, whether good, bad or just plain stupid. "All of that comes into one price."
His long-term outlook for gold is bullish, based on such factors as global fiscal and monetary reflation, worsening imbalances, investment demand, flat supply and his assessment that prices have room to run higher. He acknowledges such potential negatives as tighter government fiscal policies, which would boost public confidence in monetary policy and hamper economic growth.
But then he places the positive case in the simplest of frames: "We really are not in a position to raise interest rates significantly. We don't want tight monetary policies and we don't want tight fiscal policies. And when you don't want those, it's a pretty good time for gold."