As gold continues its sell-off, a book by a Toronto bullion fund manager predicts better things lie ahead.
LISI NIESNER / REUTERS
The emblem of Canadian Royal Mint is pictured on a gold bar. (Jan. 16, 2013.) Germany's Bundesbank plans to
It’s been a dreadful stretch for gold bugs.
The past three months have seen a record quarterly drop in gold’s price. In the bigger picture, gold is more than a third below its peak of $1,900 (U.S.) an ounce, reached in 2011. Last week, the spot price tumbled anew, settling near $1,225.
Goldman Sachs now sees a price of $1,050 by the end of next year. Barrick Gold, one of the world’s biggest gold miners trimmed 100 head office jobs mostly in Toronto. And Australia’s Newcrest Mining wrote down the value of its assets by $5.5 billion.
With news like that who’s buying gold now?
Nick Barisheff, CEO of Toronto’s Bullion Management Group for one.
Barisheff runs several precious metal mutual funds, so always likes gold’s lustre. His funds have been around since 2002 and own gold, silver and platinum bars, rather than mining stocks. BMG’s holdings are stored in bank vaults and the funds are RRSP and TFSA eligible.
Barisheff is the author of the recently published $10,000 Gold: Why Gold’s Inevitable Rise Is The Investor’s Safe Haven (Wiley, $39.95). As the title boldly predicts, he sees the metal at $10,000 an ounce, and soon — within seven or eight years. The timing of the book’s release couldn’t be worse, but even so Barisheff says bullion is down, but by no means out.
“Nothing goes up in a straight line,” he said in an interview. “Every market has pullbacks, but (global) debt problems haven’t been fixed and they’re getting worse.”
His book took five years to write and walks through the history of gold and its relationship to paper money. The book’s central thesis is that, in all cases where financial systems disconnect from a gold standard as the U.S. did in 1971, politicians and central banks gradually lose fiscal discipline. The gold standard forces paper money to be backed by bullion in a vault, so limits the amount of money that can be created.
His oft-cited examples of hyperinflation include Rome, the 1920s Weimar Germany and current day Zimbabwe. Inflation in the African country reached 231,000,000 per cent in 2008. The list could also have included Argentina (1975-1991) and Brazil (1980-1994).
In the book, Barisheff argues there are five stages that lead to runaway inflation and we’re in phase three. In the first two, the gold standard is abandoned. Looser restrictions lead to more money in circulation. Inflation is low. The political focus shifts from repaying debt to using it as a tool for growth.
He believes we’re near the end of the third phase, when a steady diet of low rates causes housing and market bubbles to form and burst. Savers are punished, because savings earn less than inflation. For lack of an alternative, we all invest in the stock market through our pensions and investments. This pumps up stock prices.
In the short run, people feel wealthier because the value of their homes rises along with the size of their stock portfolios. So they borrow more and the party goes on.
The last two phases are the reckoning. Cheap money can’t stimulate any more growth and just creates inflation.
If this is so, why is gold selling off now? The main reason is the run-up between 2008 and 2011 which was caused by the expectations of inflation that didn’t materialize. Central banks flooded their economies with cheap money, but rock bottom rates — prime is at a 77-year-low in Canada — hasn’t revived the patients. With no inflation in sight, precious metals have swooned.
Last week’s slide began when the U.S. Federal Reserve signaled it may wind down its bond-buying program. That would let rates rise, further dampening expectations of inflation. But Barisheff doesn’t see much room for interest rates to go up, because he believes we’re in a cheap money trap.
“Every 1 per cent increase in interest rates adds $180 billion to the annual U.S. deficit,” he says.
The book is well worth the read for its historical perspective. It also has interesting predictions on how the retiring baby boom will affect public finances. But the book ultimately fails to convince that the worst is about to come. It pushes a single outcome while ignoring other possibilities.
Agreed that inflation is likely to rise and yes there are huge sovereign debt problems. But hyperinflation isn’t the only way it all ends.
History never repeats itself exactly. Brazil, once a basket case, is an emerging economic powerhouse. The United States and the countries of the European Union are not Zimbabwe, Bolivia or Kazakhstan. A modest tax increase and spending cuts could tame the U.S. deficit. There are signs Canadian and U.S. consumer debt is falling, suggesting more saving and less spending. Companies are sitting on piles of “dead money.” That cash is waiting to find a productive use with which to create jobs and wealth.
Barisheff keeps all of his personal investments in his funds. He does not recommend that for us, saying a portfolio with a 10 per cent gold holding is a good basic hedge. He acknowledges things may not unfold as he predicts, but firmly believes we’re headed for a period of rapidly rising prices.
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