Can Gold Go Any Higher?

Published in Investing on 20 July 2011

Gold has breached £1,000 an ounce, so where is it headed next?

The price of an ounce of the shiny yellow stuff smashed through the $1,600 and £1,000 barriers this week, though the barriers are only psychological -- we'd be using different numbers if we had 8 fingers instead of 10.

But the actual value isn't psychological; it represents a huge amount of wealth that's been taken out of cash and shares, and stashed away in that glittery safe haven from economic woes.

Of course, most of it stems from the ongoing fallout of the banking and economic crises, with fears of further banking insolvencies still very real, and a good number of investors have already pencilled a Greek default into their plans.

And if those things happen, there'll be a lot of headless chickens running round the investment world.

So does that mean gold is likely to head even higher? Well, that may well be the case, even though the stuff has little intrinsic value -- you can't really do anything with it, it doesn't generate new wealth, and it only has value because everyone has decided that it has value.

What the fund managers say

On Wednesday, the Association of Investment Companies issued a press release, outlining what some investment managers are saying about it. Given that those surveyed had holdings in gold, it's perhaps not surprising that they were all somewhat bullish about it, but there are some interesting thoughts.

They are pretty much united in their belief that the aforementioned economic problems are not going to go away any time soon, though there does seem to be quite a strong belief that low interest rates lie behind the attraction of gold.

I'm not sure I see that myself, at least not from a private investor's point of view, as piling into gold when it is at record prices in order to avoid a few years of paltry returns from cash in the bank seems more risky to me than investing in solid dividend-paying shares. But then, it is often when something has already gone through the roof that people seem to think they should buy it.

The experts also think that gold mining shares have some way to go to catch up with the metal itself, though whether Foolish investors, who tend to have a longer view than the latest "catch up with the shiny stuff" memes, will share that opinion is another matter.

Both Catherine Raw from BlackRock World Mining Trust (LSE: BRWM) and Will Smith from City Natural Resources High Yield Trust (LSE: CYN) suggest that rising interest rates could signal the end of the bull run for gold, and they may be right. But that's likely to need some recovery in our economies and improved confidence in business first, and that will surely be the real reason people start selling off the gold and heading back to shares.

What are your thoughts on gold? Do you have any squirreled away? What would tempt you back out again? Please share your thoughts, below.

More from Alan Oscroft:

Share & subscribe

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

HousingBear999 20 Jul 2011 , 4:42pm

It's a difficult one. Whilst I love the fundamental story, and (as a housing bear!) would enjoy buying some protection against further excessive central bank largesse (continued "emergency" low interest rates and QE x?), and would also like a hedge against continued effective fiat currency (incl. Sterling) devaluations, buying into Gold at an all-time nominal price high would rankle with my value-seeking sensibilities. So am paralysed into inaction!

jeff700 20 Jul 2011 , 5:06pm

The last bull markets in houses, shares, oil etc have all blasted through new inflation highs. Why shouldn't gold? It would be more of a shock if gold didn't reach at least $2000.

ANuvver 20 Jul 2011 , 5:10pm

What HousingBear said.

Just seems too - damn - hot.

A month ago, BLT and ANTO made sense. Maybe they still do. Maybe they soon will again. I'm standing watching the tables and wondering when to buy shares in the casino...

supasap 20 Jul 2011 , 5:35pm

I am exposed to mining shares in a fund.......... done wellso far .....but as usual caught in between fear and greed

F958B 20 Jul 2011 , 6:14pm


Gold is hot and perhaps overdue a pullback.

Gold is overvalued - probably more fairly valued around $1000 (£650).

Gold is in a powerful bull market which has yet to truly go parabolic when looked at on semi-log-scaled charts (which is the only true way to determine parabolic charts).

Gold feeds on fear - the most powerful human emotion - and there will be plenty of fear once the PIIGS and chickens come home to roost in the next few years and those foolish enough to have lent money to the PIIGS find that they can't even get a return *of* their money, let alone a return *on* their money.

Gold will go considerably higher as fear grips investors - at least 50% higher and quite possibly more than doubling by the middle of the decade.


F958B 20 Jul 2011 , 6:17pm

Forgot to mention the long-term, semi-log-scaled, Dow:gold ratio, which looks set to move from the current 8x to below 5x before the longer-term trend reverses back to favour equities.

.....or the house:gold ratio, which also has scope for a significant move in gold's favour before the trend reverses.

supasap 20 Jul 2011 , 7:27pm

f958b yes well let's hope you are right ............. wouldn't it be great is someone rang a bell to sound the top......... trouble with parabolics is you need a para before it turns into bollocks

kiffberet 21 Jul 2011 , 9:43am

If the US kick of QE3 then i'll look to pile into gold. In the meantime I'll just sit it out - too scared to buy at this price, especially when shares look good value, and companies reporting decent results.
Kiff

AleisterCrowley 21 Jul 2011 , 11:16am

So am paralysed into inaction
And me, I think it's the drink.

I almost (!!) bought gold when it was a lot lower but have a real problem with it - as mentioned it doesn't generate wealth and just sits there 'being gold' with the ownership changing every so often. I'm with C Munger on gold I think...

sippquixote 21 Jul 2011 , 2:06pm

Paralysed into inaction?
Unparalyse yourself. Ask yourself a simple question:

"Do you think that the supply of gold will grow as fast as the supply of paper money and government debt in the forthcoming years?"

When you have answered this question you will know whether to buy gold.

Tykethat 21 Jul 2011 , 4:21pm

Isn't it basic economics?

Inflation in the developed world, especially UK and USA, Inflation in developing world especially Brazil and China.

USA printing dollar bills like never before, EU doing same effectively.

Interest rates at rock bottom.

Debt crisis in USA & EU

If this isn't the perfect scenario for gold then I read the wrong books.

Like everyone else, i thought gold was too high at $700 but I still bought, same at $900, $1100 and $1300...... most recently I have been back to buying mining share of all sizes as I felt that the disconnect between miners and gold itself had stretched too wide.

To be honest and using the phrase of the week "with 20-20 hindsight" I wish i had put my entire portfolio into gold when it pulled back to $1300 dollars earlier this year.

TMFBoing 21 Jul 2011 , 7:15pm

If this isn't the perfect scenario for gold then I read the wrong books

Perhaps perfect if you believe gold and cash are the only options.

But returns from actual wealth-creating business (which power *every* other kind of investment that exists) aren't based on interest rates or the printing of banknotes.

Best,
Alan

F958B 21 Jul 2011 , 7:40pm

TMFBoing

Yes, real wealth-producing businesses are the best long-term investment, but they tend to take a battering with the overall market when the crises hit and even the best businesses are subject to periods of overvaluation as in the late 1990's (which leads to lower long-term returns as in the last decade).

It isn't always a good time to buy a good business.
Charlie Munger is the Jerk (his choice of word to describe gold investors), for not realising that gold *does* have a place and a time - usually when governments can no longer give the masses what they want and instead have to give them what they deserve.

Having vastly outperformed BRK over the last 15 years (helped considerably by riding the gold/commodities bull), I don't care whether Munger wishes to describe me and similar investors a Jerks.

ScottishPound 21 Jul 2011 , 8:00pm

Gold investors are Jerks? ....... or does he mean Tossers (in the coin sense)?

I bought some Sovereigns and Krugerrands in 2005/6 and they are now worth 4 times the purchase price.
Okay, there's no income, but a return of 28% p.a. compounded over 5.5 years is a good return particularly during a difficult period, so that works for me as store of value.

Still holding and waiting for the right time to liquidate the original stake to leave "free" gold to keep for a rainy day.

TMFBoing 21 Jul 2011 , 8:23pm

It isn't always a good time to buy a good business.

That is very true, yes.

I just happen to think that now is a good time to be investing in good companies - and that there are plenty of solid ones around with good prospects and paying good dividends. In fact, I think people will look back on these few years and rue the opportunities they didn't take.

But having said that, I'm happy to confess I have no idea how to time the gold market, and I congratulate those who can do it successfully.

Having vastly outperformed BRK over the last 15 years (helped considerably by riding the gold/commodities bull), I don't care whether Munger wishes to describe me and similar investors a Jerks

Well, if you're a jerk, I raise my hat to jerks ;-)

Cheers,
Alan

F958B 21 Jul 2011 , 9:16pm

TMFBoing

"....I just happen to think that now is a good time to be investing in good companies....."

I agree. So does the well-respected Neil Woodford.
There are currently some great businesses at surprisingly low prices.

The problem is: how much cheaper might they get?

Even good businesses see their share prices savaged by downturns, despite their operating performance continuing on a steady path.
Why buy now if the PIIGS are going to implode the banking system, give the stockmarkets the biggest fright ever seen and make every share much cheaper in a couple of years time?

Given the risk of a disorderly resolution of the PIIGS problems in a year or two time, some allocation to gold seems like a prudent defensive strategy which has the advantage over cash that a devaluation won't adversely affect it.

I have gradually "taken profits" on my gold holdings and used the proceeds to accumulate a group of sensibly-priced, good quality, steady shares alongside the gold.

Although I hold a significant amount of shares nowadays, I believe that gold will outrun them because of the fear that the EU are creating with their wobbly government finances and chaotic approach to dealing with the serious threat it poses to financial stability.
If my shares take a beating in another meltdown, the gold should act as an excellent couterbalance - as it often has in the past. Government bonds - the usual "safe haven" - no longer look as safe and may not attract as much attention as gold when we have the next crisis.

sippquixote 22 Jul 2011 , 5:03pm

Not one of the correspondents above has given a valid reason why gold could fall in price in the near future.

Let's see, what would it take for gold to fall noticeably in price?

1. Final satisfactory resolution of the PIIGS problem.
2. A balanced budget in the USA.
3. Disappearance of the Japanese deficit.
4. Balanced budgets in Europe.
5.Finding a lot more oil very soon.
6. No more money printing by any government

If you think all these things will happen very quickly, then sell gold. If you don't, then be like the Central Banks and buy.
They bought 635 tonnes last year!

supasap 23 Jul 2011 , 10:11am

how many tons of the stuff are there in the world (extracted that is)

Join the conversation

Please take note - some tags have changed.

Line breaks are converted automatically.

You may use the following tags in your post: [b]bolded text[/b], [i]italicised text[/i]. All other tags will be removed from your post.

If you want to add a link, please ensure you type it as http://www.fool.co.uk as opposed to www.fool.co.uk.

Hello stranger

To add your own comment, please login.

Not yet registered? Register now.