Chicken-licken's Golden Eggs
Chicken-licken’s Golden Eggs
In the nursery tale of Chicken-licken, the panic-stricken pullet proclaims that the sky is falling when an acorn falls on its head. Repetition of the rumour to other local poultry spreads fear and confusion in the process. This is very much the case for the rollercoaster commentary being churned out in recent months on the premise of precious metals. Whenever prices fall we are subjected to bullion-is-in-a-bubble baloney and when they rise we are likewise overwhelmed with gushing prose on gold. Perhaps editors are selectively timing what they publish or commentators are reacting to price swings rather than sticking to their convictions. Either way we are lacking in definitive, credible commentary.
It is ironic that some pundits are preaching a precious metal mania yet the same scribblers were unable to spot the tech, credit or property bubbles of the last decade. This was probably because their employers had a vested interest in promoting the well-being of speculative, paper-based products. Prior to the credit crisis, full-blown crashes were relatively rare so it is perhaps forgivable that so few forecasters saw it coming. In the 30 years prior to 2005 there had been 24 boom markets across 15 different economies but only three episodes resulted in a serious slump. To cut through the clucking we can go straight to the point of stating whether gold is in a bubble. This need not entail dreary academia but can be based on empirical and practical evidence of what has happened time and again.
Looking at the evolution of bubbles, the first phase is furtive as the asset quietly compounds covertly; only extreme contrarians and insiders are involved. As institutions get wise the price gathers momentum and wealthy private banking clients get an early allocation. By the time the asset hits the headlines it has trebled from the lows, marking the half-way stage and a healthy correction usually ensues. Ownership soon spreads throughout the social strata and by the final stage prices double exponentially, then spike up the page in a matter of months. Like yeast poisoned by their own by-product, such unsustainable growth carries the seeds of its own destruction. On a purely human level, the behavioural blueprint of a bubble starts with cynicism, gains traction, fosters acceptance and ends in feverish accumulation. When the proverbial taxi driver says you’re a fool not to follow fashion, the pin drops then the bubble pops.
We appear to be at the mid-point of a major bull market in bullion. The pattern of tech stock prices from 1990 – 95 bear more than a passing resemblance to gold over the last 5 years. If the subsequent price explosion in the NASDAQ from 1995 – 2000 is mimicked in precious metals then apparently outrageous forecasts of $6,000/oz no longer seem far-fetched. Such trends are also backed by historical precedent: when interest rates are suppressed below inflation, gold prices tend to appreciate in excess of 25% per annum. If rates are kept low for a long time then the power of compounding could lead to the same parabolic path that hallmarks every mania. Gold investors must ask themselves some basic questions as to whether a final-phase bubble is already in place. Is it widely owned by the public, is it a common topic of dinner party patter, are people re-mortgaging to invest and most telling, are institutions and insiders offloading? The answer to all these questions is a resounding ‘no’. While the summer season is negative for gold in the short-term, we should be sceptical of the sceptics who are making the wrong long-term call at the wrong time. Like the gullible fowl of our fable, fearful investors are being guided by Chicken-licken commentators away from the refuge of real assets straight into the lair of liabilities and leverage.
Various endings of the children’s story may be told, depending on the sensibility of one’s offspring. In some versions the scheming Foxy Loxy devours the easily-fooled flock while in others they flee. Instead of trailing precious metal pessimists we should be gathering, not selling, our golden eggs for the future.
Toby Birch, Managing Director, Guernsey Gold Limited (email@example.com)