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Abu Dhabi, UAEThursday 13 December 2018

Will gold shine brightly again this autumn as bitcoin crashes?

Gold has not been trading at its current levels of $1,350 an ounce for almost four years

Investment expert Peter Cooper says the smart decision is buying gold futures as a hedge against the financial markets. Photo: EPA
Investment expert Peter Cooper says the smart decision is buying gold futures as a hedge against the financial markets. Photo: EPA

Gold’s been up more than $100 since I last wrote about the precious metal three months ago. It’s not been trading around current levels for almost four years and the recent $1,350 an ounce high was an important chart breakout ending a bear market.

In June I wrote about the many forces propelling gold prices to beat the S&P 500 so far this year, most critically a weakening US dollar and unpredictable new US president.

Those forces gathered strength over the summer with the euro rising to $1.20 and Donald Trump engaging in a furious war of words with North Korea, a crisis that could become a nuclear war.

For followers of the gold price it was the final break out above $1,300 last month that was most impressive and the quick sprint up in the price to $1,350 an ounce. At the very least gold now looks to have moved to trading in a higher price band.

Will it do more than that this autumn? What has changed under the hood of the global economy?

Dollar weakness is certainly a new factor. After 12 years of dollar strength we now have a declining global reserve currency. Gold and other commodities like oil are priced in dollars so tend to inflate in price as the dollar devalues.

At the same time the global credit cycle is finally turning down after a decade of expansion after the global financial crisis.

The US Federal Reserve has now raised interest rates three times. You might expect higher interest rates to boost the dollar but rather this is seen as a sign of slowing growth opportunities for US assets and a negative for investors.

Why then is the US stock market still so sky high? Well that’s now down to a concentration of speculation into a very limited number of stocks in the Nasdaq. Lesser company stocks have already fallen.

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Read more from Peter Cooper:

Time for some crash protection as US stocks hit record overvaluation

Are stocks that multiply 100 times in value a myth?

A midsummer lesson from the IMF on the dirham, dollar and pound

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The possibility that this house of cards will collapse under the weight of higher interest rates is what keeps central bankers up at night. They know this game cannot continue forever.

So the smart money is buying gold futures as a hedge against armageddon in financial markets, though not yet the physical stuff for which demand is lower than last year.

As the gold price is set in the futures market that imbalance can always be corrected in the future, and indeed gold futures are predicting that it will be.

One event to look out for is the collapse of the cryptocurrencies, now under assault from central banks around the world worried about losing control over the global monetary system and a speculative bubble.

While gold prices have reached $1,350 for the first time in ages, the digital bellwether bitcoin has crashed $2,000 from its recent high of $5,000 a coin, albeit with a rebound on Friday.

Last week JP Morgan chief executive Jamie Dimon said bitcoin was ‘a fraud. It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed.’

Even the UAE Central Bank is about to publish a study into how to regulate digital currencies.

Could it be that money from a crash in cyptocurrency speculation will now find its way into a bubble in precious metals instead?

Certainly bitcoin and almost a thousand other digital currencies have attracted a lot of hot money in search of instant riches as a giant Ponzi scheme paying out to early investors while leaving long term holders exposed to a wipe out situation.

But why should investors in overvalued global financial markets and hot-air speculations like digital currencies retreat into precious metals at this stage in the cycle?

It’s an insurance policy against disaster and a diversification that always has a residual value. Gold or silver, at least in physical form, is the oldest form of money, a real asset that cannot be spirited away by plunging global stock markets, nor lost as computer code containing supposed riches.

And all it takes is a relatively small number of investors around the world to decide to allocate five to 10 per cent of their wealth to gold and silver to radically improve its valuation.

Now you have to ask yourself how things look around the world for investors this autumn. True global economies are not performing that badly despite the uncertainty and instabilities of Donald Trump and the hiatus over British plans to leave the European Union.

Then again this could all be a time lag effect. What we see now is economics reflecting past good policy and not the bold new future offered by neo-nationalism and restrictions to free trade, higher interest rates and weaker stock markets.

Even if you disagree that global economics will go this badly wrong then few commentators would seriously challenge the notion that the US stock market is now seriously overvalued and due for a correction. They only argue about exactly when this will happen.

At the same time the global credit cycle has definitely shifted to higher interest rates and that is the usual precursor to an economic recession. These are just the facts of life this autumn.

Those who think that this time will not be different are holding their noses and buying precious metals. This is why the price is going up and could astonish us all in the near future.

Just look at how bitcoin prices suddenly took off. Will gold coins be next?

For the best investment opportunity in the precious metals complex look at the mining shares where the recent metal price rises have not yet been reflected in higher share prices.

The two top exchange traded funds for shares in the producers of gold and silver respectively are GDX and SIL, or if you want the more risky junior shares then GDXJ and SILJ should offer the highest leverage if gold prices move sharply higher.

But beware of being too aggressive as leverage also exaggerates losses as well as profits. Leave the losses to those unable to part with their digital currencies.

Peter Cooper has been writing about investment in the Gulf for over two decades