Historically, the players that fare the best in any investment bubble are usually those that cash out and buy precious metals, says Peter Cooper
Could gold do a bitcoin and hit $10,000 an ounce in 2018?
After bitcoin’s spectacular price spike this year, could gold be about to stage a similar grand finale to its bull market that began back in 2000?
Bitcoin also took many years before its final speculative reach-for-the-sky. Indeed, the scramble to buy at the last minute has been reminiscent of gold’s previous price spike back in 1980 after a long run up in prices during the economically unstable 1970s.
There are certainly goldbugs who argue for $10,000 an ounce convincingly. Ex-CIA macroeconomic adviser Jim Rickards’ latest tome, The New Case for Gold explains how gold will again be needed as a linchpin of the global economy.
Recently he has been writing this could come as soon as January 1, with a new kind of gold standard as an answer to US dollar instability.
Locally Richard Poulden, chairman and chief executive of Dubai-based and London-listed gold trader Wishbone Gold, has eloquently presented the case that massive Chinese gold buying in recent years can only be explained as preparation for a gold-backed yuan.
However, for either of these theories to come true, and it has to be said many macroeconomists would consider them far fetched, then the signs ought to be clearly visible in gold charts now and from fundamental analysis too.
Let’s consider the technical charts first. Now while it is true that some speculators have dumped gold in 2017 to jump on the bitcoin bandwagon, and done very well, it is also true that gold has had a very good year.
In fact, gold prices in 2017 have risen from a low of $1,127 and peaked in the summer at $1,348. This is actually the gold price's best performance since 2010.
In short, the recovery from the 2011-2015 gold price correction has been gathering momentum. Without going into complex statistical analysis, some important chart trend lines have been broken in a bullish direction.
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What has been frustrating this year is that the take-off for gold prices that seemed to be happening in the summer did not follow through. Blame bitcoin for stealing gold’s moment of glory, at least for the moment.
But that does not mean gold’s price spike is far away. It could come as soon as the bitcoin bubble bursts, or for that matter when overvalued global stock markets correct themselves.
You do not have to look very far among commentators to find eminently respectable bankers and economists who will tell you to stay well clear of bitcoin as a classic speculative bubble, or for predictions of stock market doom.
Bitcoin is a totally unregulated market, already prone to fraud and theft with exchanges that regularly breakdown.
Even the price spike itself tells you all you need to know: no asset class can ever sustain a price trajectory like that for long as it depends on attracting more and more buyers and this always has a limit.
So what happens when bitcoin blows up?
If history is any guide then in periods prone to investment bubbles, like ours with its low cost of capital and highly inflated asset prices, then speculation will move on to something else.
Why should it be gold and its even shinier sister silver? Well, historically, the people who always do best out of any investment bubble are usually those that cash out and buy precious metals.
There is also another better reason to be sure: gold and silver prices are relatively low and have lagged behind other asset classes since 2011. So if you are looking for an underpriced asset in an overpriced world then precious metals fit the bill nicely.
You could also argue that gold and silver have the backing of physical metal, unlike bitcoin - which is nothing more than a pile of computer code supposedly backed by your original cash deposit that may no longer exist. Gold is the ultimate safe haven asset in an uncertain world.
Then again maybe the gentlemen goldbugs mentioned in the opening paragraphs have a point too, and their analysis is not so far apart, they just come at it from different geographies.
Basically the world’s wealth is moving eastwards. China and Asia are rising while Europe and the United States are in relative decline. Hence it makes sense for China to do business in its own currency.
Why should the world’s largest importer of oil pay for it in US dollars? Why should oil exporters not accept yuan, especially when China is also now their biggest source of imports?
It makes sense. But how would you achieve such an epic shift in currency? Backing your currency with gold is one solution. It is how sound money was guaranteed before 1971 when Richard Nixon took the US dollar off the gold standard.
On the other hand, put yourself in the shoes of Donald Trump and what would be the best way to defend the US dollar against the rising tide of Chinese commerce? Putting the dollar back on something approximating to a gold standard would be a logical answer and might work.
Personally I believe the best immediate reason gold might suddenly spike to $10,000 in the course of 2018 - and I am not predicting this as I am not an astrologer - is that US dollar weakness looks to be an established trend now, and will get worse.
A weaker dollar is good for commodity prices - and that includes gold and silver, which always react strongly to the first whiff of inflation.
Inflation is making a comeback and US tax cuts will guarantee it by boosting the global economy further and putting upward pressure on global commodity and labour prices, while weakening the dollar by adding substantially to US debts.
Gold prices will respond by moving upward sharply and the madness of crowds could turn that into a bitcoin-style price spike. So yes, gold could get to $10,000 an ounce next year.
Peter Cooper has been writing about finance in the Gulf for more than 20 years