| | | Miners priced at near-death experience with gold at a landmark
Prices have plunged so far that shares are worth the same amount of gold as they were in 2008
When Romans bribed pirates they turned to the only universally agreed measure of value: gold. A similar approach is taken by those who doubt the true worth of today’s government promises. On this basis, global equities have hit a landmark – gold prices have now plunged so far that shares are worth the same amount of gold as they were the day after Lehman Brothers failed in 2008.
Investors are more likely to treat gold as just another contributor to profit, or, more recently, loss. Gold last week hit its lowest in four years, and is down almost 40 per cent from its 2011 peak – though still above post-Lehman levels.
Treat gold as insurance against disaster, rather than a speculative flutter, and the fall makes some sense. The outlook for developed economies is far better than in 2011, and the monetary splurge has not led to runaway – or any – inflation. Fears of US default or eurozone collapse have gone, and talk now is more of deflation risks than inflation.
Tied to better economic prospects is the higher opportunity cost of holding gold: the yield offered by 10-year US inflation-linked bonds is up from 1 percentage point below inflation to almost half a point above.
Geopolitics may seem to have done little to support gold. But in fact the metal’s three-year crash still leaves it sharply up over a longer period. The 10-year return on gold is still above 10 per cent a year, far better than the 8 per cent from the S&P 500, including dividends, or the 6 per cent from equities outside North America. Gold would have to fall from the current $1,158 to $900 an ounce for the 10-year return to match that on US shares.
Gold at $900 would destroy many of the gold miners, already among the worst performing shares on the planet. The FTSE index of large global miners is back to where it stood in 2003, worth less than a quarter of its 2011 peak. Over 10 years investors have lost almost 5 per cent a year, dismal compared with wider equities or gold itself.
Gold miners are priced for a near-death experience. If gold starts to recover – if inflation picks up, or political instability returns – their shares should do fantastically. If gold continues down, shareholders will metaphorically suffer the fate Julius Caesar inflicted on the pirates who captured and ransomed him: crucifixion.
james.mackintosh@ft.com |
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