With paper values in such an exaggerated state of flux, gold—boring, yellow and shiny—looks like a rock of sensibility and stability.
Gold also looks like it could go a lot higher, at least according to an inflation-adjusted chart of the gold price. Gold’s nominal high is US$850, set in late January of 1980. But US$850 just doesn’t go as far as it used to. In today’s dollars, gold’s 1980 high was over US$2,271.59
Does this mean gold is going to US$2,271 and beyond? Not exactly. It could happen. But as one listener at the Melbourne Investment Expo pointed out to us, gold isn’t a sure thing.
“If you bought gold in 1980 and held it, you would have lost money for twenty years, not only in nominal terms but adjusted for inflation, especially if you weren’t earning any interest on your gold. It’s a dangerous thing. Bear markets can last many years.”
He’s right. Entire asset classes can go into 20-year bear markets. Gold and resources endured one such bear-market, only bottoming in 2000 and beginning a rally that swept up resource stocks (including Aussie stocks) in 2003. It’s been full speed ahead since then.
Our view here is that resources weren’t just in a 20-year bear market in 2000. They were in a 200-year bear market. During the first two industrial revolutions—in Great Britain and the United States—the supply of commodities grew faster than the populations of the industrialised world.
The urbanisation of the globe, along with the Green revolution in agriculture, have led to a population explosion…which has created greater demand for commodities than ever before. And now we have the third industrial revolution in China—only a much greater, much more resource intensive scale.
As people move from the farm to the city, they need a place to stay, a place to eat, a place to work, a place to shop, a place to sin, a place to get sick, a place to heal, and a place six feet underground when it’s all over. You need a lot of places filled with a lot of stuff for 6 billion people.
Life itself has become more resource intensive. And there are 6 billion buzzing, teeming, eager, anxious, hungry and ambitious lives on the planet.
Still, markets are driven by human beings and human beings are driven by emotion as much as logic. They over-reach, over-promise, and over-react to bad news and good. It’s worth remembering that asset prices don’t go up forever. And when they go down, it can be for a very long time. And yes, we mean property too.
Markets and Money