So, I went to the Denver Gold Forum, one of the premier investment conferences for mining equities, and went to a talk called "Updating the Bullish and Bearish Cases For Gold." Guess which side won?
I'm being flippant, and perhaps unfair to Martin Murenbeeld, the chief economist of Dundee Capital Markets. His was a thoughtful presentation, exhaustively documented and analytically rigorous (even if the "bear case" portion was mostly about why the bear case was wrong.)
Still, I was left with the feeling I had coming into the conference: That the long-term bull case for gold rests mostly on the world, particularly the United States, falling apart. And I guess I wonder: If gold could only make it close to $1,900 (U.S.) an ounce with what we went through in the past five years, what in the world is going to happen to make it meet or beat that past high?
Actually, Mr. Murenbeeld and other gold advocates have a compelling argument that things are going to come unhinged in the long term. You've heard some variation on the statistics before: The U.S. budget is now more than 60 per cent entitlements, or "payments for which no services are expected to be rendered," as Mr. Murenbeeld puts it. At the same time, developed economies are increasingly becoming "super-aged," with a growing proportion of the population 65 and older and out of the work force, collecting those entitlements.
This is all part of a continuing "global debt crisis," where the developed countries' debt-to-GDP levels have approached or exceeded 100 per cent. To reverse that trend, countries need a combination of reduced or eliminated budget deficits and GDP growth.
And with citizens unlikely to accept a cut in entitlements, Mr. Murenbeeld says, the answer is likely "reflation," where countries promote inflation, devalue their currencies, and force citizens to keep their investments at home in government bonds. Neatly, Mr. Murenbeeld cites both left-side economist Paul Krugman and Kenneth Rogoff, considered an apostle of austerity, as calling for higher rates of inflation in the U.S.
All good for gold, to be sure. Part of the problem, though, is that ever since the central banks stepped up in the financial crisis and issued a gusher of new money, inflation hawks have warned about prices spiralling out of control. And they … haven't. Now, here at Vox, we're fans of noting that being right too early looks a lot like being wrong. But it seems like we've run out of time for the monetary alarmists to be right about this one, even if many insist hyperinflation is imminent.
Mr. Murenbeeld's is a more long-term thesis (his weighted-probability forecast for 2015 is $1,335 an ounce), and the idea that democratic societies will have problems dealing with their entitlements is a compelling one. But other elements of his presentation, even parts of the bull case, reinforced my skepticism.
The gold selling of 2013, which he referred to as a "panic," was backstopped by Chinese buying. That was driven both by the country's consumers and by the Chinese government's desire to make the yuan a global reserve currency. Without Chinese buying, Mr. Murenbeeld says, gold might have fallen to $800 or $900 an ounce last year. Perhaps the Chinese economic engine will continue such behaviour. Or perhaps not.
What about a return to the old ways of using gold to back the U.S. dollar? The price required ranges from $3,700 to $9,800 per ounce, depending on which count of the money supply is used. Another old convention linking the U.S. dollar to gold, the Bretton Woods system, was abandoned more than 40 years ago. To return to it, Mr. Murenbeeld says, would require a gold price well in excess of $25,000 per ounce.
These facts are included in Mr. Murenbeeld's bull case as a small part of the evidence as to why gold is not "expensive." Instead, I'd put them in the bear case: They illustrate why gold prices have been permanently – and appropriately – disconnected from the U.S. money supply.
After Mr. Murenbeeld's talk, another Denver Gold Forum speaker approached him for a lengthy chat about the most important factors driving the future gold price – and how the typical U.S. investor remained uninterested in the yellow metal.
"That's okay," the man said. "If there were agreement, there wouldn't be an opportunity."
I suppose that's one way to look at it.