Famed economist and investor Benjamin Graham once said that “In the short-term the market is a voting machine, but in the long-term it is a weighing machine." Last night’s move in gold was a classic knee jerk 'vote' against economy recovery with investors and speculators alike piling in. The weighing machine analogy suggest that in the longer-term things will revert to their true worth — in gold's case this is not a problem given its compelling fundamentals.
With the US Federal pledging to keep interest rates in check until late-2014, gold soared to $1,713, its highest since Dec. 9, 2011, a rise of nearly $45 or 3% on the day. Last night’s move in gold was the largest in four months.
The decision by the Federal Reserve was resounding with a 9-1 vote in favor of capping medium-term Treasury rates. Gold investors, however, chose to ignore a further statement which advised the Fed would be targeting an inflation rate of just 2% — but the voting machine advised "we don't believe you".
Gold was lifted by heavy buying of gold futures on Comex where it witnessed volumes twice the previous month’s average. Although there was heavy speculative buying, anxious investors joined the fray who are concerned about currency depreciation as global central banks use easy monetary policies to flood markets with cash.
For savers, low rates are bad news. For the economy, this is welcome relief. But for the gold market, it ensures that the decade-long bull-run has at least three years, but probably closer to five years, to run. For us, it confirms our view that gold is roughly two-thirds the way into its rally in terms of years and roughly half way there in price terms — that is because of the compounding effect on prices which gain roughly 20% per annum on average.
Later today negotiations will continue in Athens with the Greeks hoping to prevent a disorderly rout by agreeing to a debt swap with bondholders.
Physical demand for gold in Europe outside of Germany has been patchy of late. German and Swiss investors have been in this bull-run from the outset and understand the important role that gold plays. They have been well rewarded for this prescience. UK investors on the other hand have joined the party late and generally show less commitment and enthusiasm for gold... demonstrating fully their natural skepticism. Hi ho.
Norman is the owner and chief executive officer of the London-based gold broker Sharps Pixley Ltd.