Still plenty of mileage in the gold bubble

There is nothing like a price correction to challenge your faith in a long-term investment. Is the game up? Is it time to sell-out? To answer these questions gold and silver investors need to go back to the original rationale for their investment and ask if it still stands.

So has the world decided to stop printing money and raise interest rates to squeeze inflation out of the system? Has there been a collapse of bond, equity and real estate markets on the back of rising interest rates? Is the world and his wife an investor in precious metals?

Rare investment class

You will still struggle to find individual investors holding gold, and silver is much rarer. They generally still prefer residential property, despite its five-year decline in key markets like the US. And if somebody does own precious metals then it is as a relatively small percentage of a portfolio that is dominated by equities and bonds.

No matter that since the end of 2000 stocks are up nine per cent, bonds 67 per cent, while gold has quadrupled in value and silver is up five-fold. Serious investors will still turn to you and say that they don’t like gold because it does not pay interest. Who cares if you have quadrupled your investment?

Then again gold and silver had their worst January for two decades so reaffirming the faith is necessary now. But there seems little reason to see this as anything more than a correction in a bull market.

Indeed, the pull back of $100 was rather less than the $200 fluctuations seen earlier in this bull market, for example in the 18 months of leapfrogging back and forth to cross the $1,000 barrier.

Now the experts Bloomberg found to have the best forecasting record of the past two years have an average of $1,620 an ounce for gold and $36 for silver by the end of the year. That is an annual gain of 17 per cent for gold and 19 per cent for silver at the time of writing.

Hedge funds

No wonder the big hedge fund boys are playing this game. Paulson & Co and Soros Fund Management both have large stakes in the gold ETF SPDR. George Soros said in Davos last month that the boom in commodities may last ‘a couple of years longer’ but has noted in the past that gold is not the place to be once central banks turn strongly against inflation.

However, it is as a hedge against a collapse in the bond market that bullion should really deliver outperformance. For as global inflation rises there will be more and more pressure on interest rates, ultimately causing a crash in the bond market. Higher interest rates will also be bad for business and therefore equities, and horrible for leveraged property markets.

In this asset bonfire the only thing that will still be in demand will be gold and silver, albeit at record prices. Buy and hold your gold and silver!