All that glisters...

The March Hare is the most cynical, cold-hearted investor you will ever know. He uses no benchmarks, interprets risk on his own terms, and takes vast (but hopefully considered) risks.

The Punt

The Hare sees no reason why investors should be flocking to what Keynes called a ‘barbarous relic’ when cash or government bonds pay interest and are just as safe.

IG Index offers a spread bet on price of spot gold, which as of April 19 was priced at 399.7 to buy and 398.9 to sell. The contract is based on the daily closing price and the Hare is leaving a standing instruction to roll the bet over each day. The spread on the spot bet is much tighter than on a futures contract, which will save the Hare money if he is able to make a quick killing. The bet is £1,000 per basis point. The Hare likes to use spread-betting where possible as any gains are tax free.

Reasons

Gold has done very well since the end of the Iraq war. Yet the metal’s popularity is based largely on historical accident rather than investment logic. The value of currencies was tied to the value of gold until 1971. Central banks and governments in developed countries still hold massive reserves of the yellow metal, which hang like a spectre over the spot market. The gold industry has fought a long rearguard campaign aimed at persuading them to hold on, but if central banks were starting from scratch today, they wouldn’t feel any obligation to buy large quantities of metal. The Economist in 1992 called gold ‘the spent fuel of an obsolete monetary system.’ Almost everyone who works in the investment industry under the gold standard will have retired a decade from now.

Gold’s recent outperformance is little more than a reflection of the weakness of the dollar. In euro terms it has risen only very modestly over the last three years. Gold is priced in dollars. It tends to rise when the US currency falls as this makes it more attractive to dollar buyers. If the internet bubble crash and the worsening Middle East crisis have been insufficient to prompt a gold recovery against non-dollar currencies, then one shudders to imagine what it would take. The fact is that if investors think the dollar is going to fall, they can earn interest simply by holding cash or bonds in another major currency. There is no reason for them to turn to gold.

‘It gets dug out of the ground in Africa or some place,’ said Warren Buffett in 1998. ‘Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.’

Update

The Hare is smarting from his punt on the direction of the UK housing market. He used spread-betting to wager that property prices were set to tumble, selling June house prices at 153.1. The IG Index contract had advanced to 156 by April 19, meaning a paper loss of £2,900. The Hare is willing to stubbornly hold on, yet the incident shows that you should never copy him.

A word of caution

As ever, don’t just follow me blindly and then complain when things don’t work out. If you’re investing anything at all, you ought to be smart enough to run anyone’s ideas through a sieve of common sense.

In fact, take professional advice before you invest anything anywhere. The March Hare and his keepers at Investment International are not giving you investment advice.