Gold Signals the End of the Commodities Bull Run: Matthew Lynn
Oct. 10 (Bloomberg) -- There are two commodities that stop traders from thinking straight: oil and gold.
Oil already has everyone worried about a return to the depressed 1970s. Now it is the turn of gold. In the past few weeks, the shiny, hard metal has sprung to life, raising the value of mining giants such as Anglo American Plc. At more than $470 an ounce, it is at levels unseen for almost two decades.
Whatever the financial jeremiahs may think, the gold rally isn't telling us that the global economy is about to descend into hyperinflation. Nor is it saying paper money is worthless, and people are hoarding something more reliable.
It just tells us there is too much cheap money floating around. The price of almost every other commodity has already exploded. It was only a matter of time before gold had its turn.
The increase in gold prices probably signals the end of an inflationary period, not the start. The rising price of gold looks like the last gasp of the commodities bull market.
``The prevailing view is that gold is rising because it's a hedge against some kind of financial Armageddon,'' said Richard Cookson, strategist at HSBC Holdings Plc in London, in a telephone interview. ``Unfortunately there isn't any real evidence to support that view.''
It certainly has been a good few weeks to be invested in the metal. Gold has now gone higher than $470 an ounce, up from about $430 at the start of the year. It has left the low of $255 it reached in 2001 way behind. You have to go back to 1987, when the price hovered near $500, to find gold at these prices. In real terms, you'd have to go back to 1980, when it was at $800.
Hedge Funds
There is plenty of evidence that hedge funds, everybody's favorite whipping boy, have been piling into the commodity. According to U.S. Commodity Futures Trading Commission figures, hedge funds and other large speculators increased their net-long position in New York gold futures in the week ended Sept. 27.
Shares in London-based Anglo American have risen to 16 pounds from 12 pounds at the start of the year. Johannesburg-based Harmony Gold Mining Co. is up 40 percent in 2005. South Africa's gold- dominated FTSE/JSE Africa All Share Index has surged almost 30 percent.
``Gold can often be an indication that people feel the willingness of politicians to control inflation is gone,'' said Stephen Lewis, chief economist at Monument Securities Ltd. in London, in a telephone interview.
Gold is sometimes seen as the ultimate hedge against inflation. It is the oldest form of money. There is a limited quantity of it in the world. Measured over time, gold has been a solid investment.
The Bull Case
With higher oil prices, interest rates in Europe at a six- decade low of 2 percent, and signs of inflation emerging, you have the ingredients of a bull case for gold.
And the traditional inverse relationship between gold prices and the dollar no longer seems to be in place. When the dollar was down, investors would buy gold, and vice-versa. The U.S. currency's 3.9 percent surge against the euro during September did little to curb the gold rally.
Yet the bull case may not be right. According to HSBC, there has been no link between gold prices and inflation for the past 25 years. The correlation between the two isn't discernable, it said in a report last month.
And there isn't much demand for the metal, particularly since the world's central banks have started unloading their supplies. Total demand last year was less than in 2000 and 2001, according to HSBC.
Aversion to Volatility
Indeed, there may already be some signs that the latest rally is peaking. ``Grass-roots consumers are renowned for their aversion to price volatility, especially in the gold market, and a gain of 10 percent in a month is precisely the kind of volatility that will deter buyers for a period of time,'' the London-based consulting firm GFMS said in a report this month.
It found little evidence of sustained buying from nations such as India or China, where gold has always been a popular investment. GFMS forecasts an average price of $439 for 2005.
Gold's lateness in joining the asset-price bubble is a good indication of how far gold has fallen in the esteem of investors. Equities, bonds, real estate, oil, commodities, art and just about every other asset has shot up in the last five years. Until recently, not gold.
Interest rates in the major economies, with the possible exception of the U.K., are going up. There will be less easy money around. Growth is about to slow, reducing the prices of all commodities, including gold.
The gold rally is likely to be the last for commodities for quite a while. If it goes to $500 an ounce, anyone buying will be in for a rude shock.
To contact the writer of this column:
Matthew Lynn in London at matthewlynn@bloomberg.net.
