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QE and gold: It’s a good time to be a lunatic

With the Dow on the verge of exploding, the market’s character switch has been amazing

Image Credit: EPA
US Federal Reserve chairman Ben Bernanke. The Fedis planning phase out its bond buying programme.
Gulf News

They say that no one ever criticises madness when it is working in their favour. This is why few people working in banks made a fuss before the balloon went up in 2007 and 2008.

Likewise if you criticise a stock that is flying to the moon for being too expensive you will not be thanked.

When it falls you will be blamed too, as if pointing out a lunatic is the same as making them mad. So it is with mixed feelings that I’m watching the Dow and, to a lesser extent the FTSE, going ballistic.

It’s understandable for the Nikkei to collapse and zoom — there is a revolution under way in Japan. However, the post ‘taper panic’ rally is so strong that even while I’m long and prospering, it leaves me a bit breathless.

Of course we are in a new era, and I’ve been writing as much all year, but to see the market change character is quite amazing, even if you are expecting it.

There is always a chance this is a mirage and that at any second the roof will cave in, but as I write the Dow looks like it is going to explode. If it explodes the implications will prove to be significant.

For one thing interest rates are going to go back to pre-2008 levels and perhaps a lot faster than expected. To keep base rates at affordable levels is going to take a lot of QE. We will then be talking about naked monitisation rather than the tight money laundering that is currently going on between governments and their dependant banks.

Currently QE is a kind of accounting trick, where banks make fortunes on free money but cover them up by vapourising their massive, but unaccounted for, bad debts.

Furthermore, if interest rates rise then governments will have to buy their bonds for cash to fund themselves and keep base rates in check.

That would create another round of historic financial insanity and chaos.

Meanwhile, back to the present, and it appears there isn’t a significant gold mine that doesn’t produce enough significantly above the current price. How did that happen?

You can by gold cheaper in a store than they can dig it out of the ground now. The rough cash price on average amongst the majors gold miners is about $1,600 (Dh5,877) an ounce. For some of the big names it’s over $2,000.

So in practice I, Clemgold Mining Inc, can buy gold for $1,300 an ounce and sell it again and you, my shareholders, could pay me $100 an ounce to do it and I’d be a more profitable company than half of the biggest, smartest gold miners in the world.

I’m left wondering if some of them haven’t been doing exactly that. It would certainly explain a lot of mysteries I can’t fathom. Perhaps Clemgold mining could just say it had an aggressive hedging strategy...

Anyway, you would have thought that gold selling below the cost of production might suggest the price will rally and I think that’s probably right, but in a business when miners can be credible, the value of their product go up by more than 500 per cent and they can still lose money, you have to wonder why you would play in that sandbox at all.

There is a lot of gold above ground and if people get disillusioned with it then its game over for a generation.

Interest rates are going up, bonds down, equities up, dollar up, yen down, but gold? I’m tempted to buy in August for a Santa-style rally. Gold was this year’s May dump, perhaps it will be the new era’s ‘Sell in May’ candidate?


— The writer is CEO of the private investor website His latest book is ‘Letters to my Broker’.