Peter Major. Picture: Robert Tshabalala
Peter Major. Picture: Robert Tshabalala

It’s not just Big Tech that’s had a fabulous market run of late — gold has just poked its way through yet another record, rallying above $1,930 an ounce this week. It is only the third time it has enjoyed such a surge since the gold standard was dropped in 1971. As Bloomberg’s John Authers wrote this week, "when bond yields are negative, gold’s lack of income ceases to be a problem", so it finds support as central banks slash interest rates and pump money into Covid-stricken economies. We asked Mergence analyst Peter Major whether it’s inevitable that gold will continue to gain as long as central banks keep printing money.

PM: Yes, I think it’s almost that simple. Obviously very dependent on how "much" money is being created and how fast. But the fact that interest rates are zero helps even more. Gold was running in the 1970s when they were printing money. But at least you were getting 12%-14% on your money on bonds and many other investments — granted, inflation was also quite high. Now, inflation might be just 1% or 2%. But if you’re flooding this market with liquidity and getting zero interest on savings, then mining stocks look like a good deal. Because they are now giving you some kind of hedge against inflation, as well as a 3%-7% dividend yield. That’s how the gold mine model was for 100 years — the gold price was flat for decades at a time. But you got a 6%-8% return on the gold mining companies.

Does a rallying gold price not depend on the greater-fool theory: that someone is willing to pay more than you did?

PM: I think greater-fool theories become more prevalent as the rally goes on. Greater fool works best in supposed growth stocks that have little or no identifiable income or means to increase it.

Authers asks if gold is falling victim to speculative excess, but then makes the point that the price increase hasn’t been fast or disorderly.

PM: Yeah, this isn’t like in the 1970s where it was doubling and then doubling again. Or in the early 2000s when it went from $250 to $400, and then from $400 to $600. But gold has averaged about $1,250 for the past five years — and it’s 50% higher now, so that’s a big move. I’ve been scratching my head for years now, asking why are all the metal prices returning to the mean, and gold is sitting at double its mean. It’s now trading close to three times the mean, and it’s acting like the whole world is turning into Zimbabwe.

But if it’s trading way above its mean, should we then not be hesitant to just pile in to where it is now?

PM: I always start there — where are you on the curve, so that’s the first warning sign. Why are you trading that high, is it sustainable or logical?

Is it not because, in getting to record levels, it attracts more money and interest simply because it’s at record levels?

PM: It does. Look, it’s like bitcoin — remember when bitcoin finally broke $10,000, how quick it got to $20,000? That’s when your greater-fool theory comes in: the majority of people only buy because they are hoping for a greater fool. I think most people who’ve bought gold have done so for very legitimate reasons, but the guys buying it now are looking for a fool because they’re the fool.

What is the correlation between gold and inflation?

PM: Go back the past 6,000 years and look at people holding gold — it’s always liquid and pretty equally valued.

What do you mean by that?

PM: If you’ve got an ounce of gold, you’re going to get about the same value for it in Russia as in China, Uzbekistan, Kenya, SA, London or Europe. So you can get a pretty fair price for it anywhere, not like uncut diamonds or other metals — like even copper, where you might have to take a 20% discount on it. I think it’s erupting now because all these countries are trying to outdo themselves with stimulus packages.

What might stop this rally?

PM: I think as the greater fools become a larger percentage of the investors; when people who’ve never invested in gold before start investing in it; when people start borrowing to invest in gold or start selling other assets. It’ll get to a stage where people will ask whether it’s reflecting reality. Sharp investors will start saying the gap between gold and the alternatives is too wide, and fund managers will start doing the switch — putting money into something that’s totally bombed out but still has decent fundamentals. Also, the gold shares relative to the gold price: boy, they’re in the stratosphere now. Gold goes up 2%, Gold Fields goes up 10%. These stocks are on 60%-70% profit margins and they’re going up five times the gold price: that’s definitely Looney Tunes.

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