Money to be made from the gold rush for the exit?

Shock horror for gold bugs: a two year low and the biggest two day decline in 30 years.

For the first time in more than a decade there is a genuine feeling that the gold price could collapse like it did in 1980 when the dollar price more than halved in a matter of months.

The equivalent today would leave gold south of $1,000 compared to its 2011 high of $1,920.  As of today, the price is hovering uneasily around the $1,375.

Plenty of people will have lost a packet but could now be the time to position yourself for a future profit?

Predicting the gold price short or long term is usually a thankless task.  How do you weigh up an asset class which offers no income and for which the real economy has little use for?

I would offer these observations, which suggest gold may not follow that 1980 trajectory below $1,000:

• The biggest source of demand for gold is Asian jewelry and Indian orders have apparently spiked upwards in immediate response to the recent falls;
• Despite all the talk of panic and rushing for the exits, most long term investors (as opposed to speculators) have stayed firm and there has clearly being some bargain hunting in the last couple of days;
• The main driver of the 1980 crash was a sharp increase in Fed interest rates.  And I mean sharp - up to 20%.  Such monetary tightening is not even the remotest prospect in the current climate;
• The 12 year bull run has been marked by substantial declines followed by steady recoveries.
• The underlying conditions that have supported the bull run - negative real interest rates and repeated but failed attempts to spark economic recovery by money printing - are firmly in place.
• Central bank buying reached a record high last year.  Once the dust settles Asian surplus countries wishing to diversify out of Western currencies will likely buy the dip.

 But these are just straws in the wind and you could probably make a list of bearish points easily enough.  And the short term is even more unpredictable with fear and volatility abounding. I won't be speculating on a gold comeback from these levels.

More interesting are gold mining shares which are unsurprisingly trading at multi-year lows.

Gold producers' profits suffer disproportionately from price falls as their costs do not fall in sympathy. Indeed runaway mining cost inflation, along with a hangover from over investment during the boom years, had already sent gold mining shares tumbling since before the latest crash.

FTSE constituent African Barrick Gold (ABG) has also disappointed the market by missing its stated production targets for three successive years.  In February ABG reported a. 70% profit decline even before the latest slide in the gold price.

But ABG has no debt and plenty of cash, some of which is due to be paid to shareholders in dividends shortly (it goes ex-div on May 1).  It has very large reserves compared to its much-diminished market value.  Its costs of production per ounce are about $975, sharply up over recent years but less than many in the industry.

A buy at today's £1.65 close (it was £4.50 at the start of the year)?

If you believe the gold price will recover at least partially then maybe.  However it had better recover quickly because otherwise ABG will be reporting losses and scrapping the dividend which will no doubt send its shares even lower.

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China and the miners: place your bets

“A crisis is an opportunity riding the dangerous wind” goes a Chinese proverb.

For investors who want to make money out of one of the century's biggest and most profitable themes - the commodities boom led by China - now is a time of great opportunity and risk.

There is an apparent opportunity because the mining shares that have done so well are relatively cheap after several months drifting lower.  And risk because the cause of the share price weakness, the slowdown in China, could yet end in a crash.

The China-boom-or-bubble debate has been a hardy internet staple on business/investment chat sites for several years.  Perhaps only the inflation-deflation argument has generated more heated argument.

On the one side you have the China bulls who believe the country's thirty year 10% annual growth record is good for another decade or more yet.  They call the current slowdown a blip and claim normal service will be resumed later in the year as government stimulus measures kick in. These include the first interest rate cut for three years and a car subsidy program.

The China bears fret that the incredible China boom is literally that - too good to be true - and that Chinese growth is unsustainable  Just like Ireland, Spain and Japan, a boom underpinned by cheap money and property speculation will give way to bust.

"Dubai times a thousand" was how a renowned bear (Jim Chanos) put it but he said that 2 years ago and, although property prices have come down in some top tier cities, the general crash he predicted has yet to materialise.

I lean towards the side of the bears but it is an oft-observed fact that the economic phenomena that seem unsustainable can persist for much longer than you think.  People have been calling the demise of the US (and Japanese and UK) sovereign debt markets for years.  They may be proved right eventually but you can lose a lot of money shorting something prematurely.

As for the bull case, I have a lot of time for Dr Stephen Loeb and he is in the "blip" corner.  His article "Silver, Copper, Gold and China" states the case for continuing China growth and a recovery in commodities (and miners) very well.

If you are persuaded by his argument and think the commodities boom has a lot further to run, then now would be a good time to back your judgement and buy ETFs which hold physical commodities like gold and copper which have suffered recently.  Loeb is very keen on silver which has a key industrial role in for example solar panel production.

Another option is the shares of mining companies.  Obvious choices are highly diversified giants quoted in London such as BHP and Anglo-American.  In the past I have had profitable dealings in mining royalty holder, Anglo Pacific (AFP), which has recently been marked down due to some specific problems at a coal mine which it will recover from (see here).

Finally I am intrigued by Glencore which always seems to be in the headlines, most recently because of its on-off merger with Xstrata.  It's shares have slid by almost a third in just a couple of months.  The markets have been a bit dubious of this company I think partly because it's profits derive from trading commodities as much as producing them and the trading bit is somewhat opaque.  However there is no doubt that the people who have built up Glencore, including multi-billionaire Ivan Glasenberg, are extremely smart and ambitious.

Buying Glencore would be a triple play on a China recovery, a successful conclusion to Xstrata merger and on the company's management.  Too rich for my blood but the share price, at under £3, makes it tempting.

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Could a China hard landing end gold's bull run?

Gold has been one of the best performing asset classes for a decade now but recent price declines (it's about 15% down from last year's high) have led some to call the top of the market.

Are they right?  Is there any value left in buying into gold at this stage?  Are the many owners of gold and gold investments like ETFs headed for a fall?

Almost certainly not is the answer but there is a very apparent danger in the short term from a hard landing in China.

To understand why gold will remain in a bull market, consider what has driven gold this far.  Some people crudely characterise gold as an inflation hedge but it's more a form of insurance against monetary collapse and chaos which often leads to inflation.

When governments abuse their currencies and lose fiscal discipline like they did in the 70s it is very difficult to find safe places to put your money. With falling bond and share prices and negative real interest rates at the bank, gold offers a last chance at preserving wealth.

Before the 2008 crash investors bought gold because they saw Central Banks stoking a monetary  bubble which portended some 70s style chaos.  Since the crash worsening government finances and extreme monetary policy have exacerbated these fears and so we have had 10 years of gold price rises without much of the inflation that it is supposed to protect against.

Crucially, on top of gold's appeal to investors as insurance, we have had very low interest rates, often negative in real terms. This negates one of the drawbacks of owning gold - it doesn't earn anything.

Indeed if you want to know when gold is going to peak then the measure to watch is real, inflation-adjusted interest rates particularly dollar interest rates.  If there were any hint that the Fed were going to normalise interest rates at a level a percent or so above CPI then gold would fall a long way in a short time.

But this is not going to happen for a while and the Fed have publicly stated that rates will stay low until 2014.  That will put a floor under the gold price, probably not much lower than where it is now.

The Eurozone crisis makes more money printing likely and is just the sort of thing that gold as an insurance policy is made for, even if in the short term the Euro's weakness is a negative for the US$ gold price (the dollar has been at its highest level for years versus the sickly Euro).

The one cuckoo in the nest could be China. Private sector Chinese demand for gold, like its demand for just about everything else in the last decade, has been relentless and is still growing rapidly.  But a lot of the Chinese economic growth since 2008 has been artificially stimulated by its government, is ill-balanced and unsustainable.

The slowdown this year has been marked and I am sceptical of the soft landing claims.  The papers have been carrying stories like this one about Chinese buyers refusing to take delivery of iron ore and honour commodities contracts - Chinese steel mills defer iron ore shipments.

It is easy to see Chinese demand turning from a positive to a negative for the gold price.  Indian demand, usually a mainstay, has already fallen sharply this year as the economy slows.  But with the financial crisis dragging on with no (happy) ending in sight the overall case for gold is as good as ever.

Gold price

I am doing a bit of moonlighting from my day job with Advoco. I have always been interested in economics, investing and politics and often publish little pieces on an amateur basis but recently I was asked to start a weekly column by Alrroya, a Dubai-based business portal. I kicked things of with an examination of the gold price which has been moving quite a lot recently (up, then down, now back up a bit).

Gold price: Paulson versus Roubini | Alrroya

I am now working on next week's piece about global warming. It is fun doing articles but somewhat pressured coming up with the ideas and hopefully good enough writing. Anyone with any suggestions for topical business or politics stories and issues for me to write about would be most welcome.