He loves only gold

“Mr Bond, all my life I have been in love. I have been in love with gold. I love its colour, its brilliance, its divine heaviness. I love the texture of gold, that soft sliminess that I have leant to gauge so accurately by touch that I can estimate the fineness of a bar to within one carat” – Ian Fleming, Goldfinger

Looks like we’ve now had a more substantial bounce, based largely on hopes of US government action to “magic away” all the banks’ toxic debt.

Will it last? I have no idea, but I do think there is at least a least the possibility of a substantial bear market rally. Remember that this all comes down to the ongoing battle between the forces of deflation and inflation: while the Credit Crunch itself is fundamentally deflationary, the actions of governments and central banks to fight it are highly inflationary.

The CCI portfolio is currently deflation-orientated: while we have taken profits on our short-China play (FXP), both UUP and IBGL are plays on, respectively, a rising US dollar and falling euro-zone short-term interest rates. It’s time to hedge our exposure with something more inflation-orientated.

I’ll make an admission here. I’ve been long gold for a very long time, almost since the time Our Glorious Leader, Comrade Brown, sold off half of Britain’s gold reserves at a rock-bottom price. I believe in Bill Fleckenstein’s mantra (In a social democracy with a fiat currency, all roads lead to inflation), view the current monetary system as essentially a colossal fraud, and so am naturally inclined to see gold bullion as the bedrock of any portfolio.

BUT (and it’s a big but) I am also aware that, at least in dollar terms, gold suffered a twenty year bear market from 1980-2000, and that the post-2000 gold bull is, perhaps, getting a little long in the tooth. And, of course, I am very aware of gold’s precipitous sell-off from August this year, taking it down from over $950 to around $730 per ounce on September 11th. We’ve had a nice bounce since then, but does that make gold a buy now at $828 (as I write)?

Well, I’m personally not buying any more, but that’s because I’ve already got stacks of the stuff. Plus, I’m still sticking with the deflation followed by inflation thesis for now, although I am monitoring the situation closely and (unlike some other commentators) am certainly prepared to alter my opinion if the facts change.

However, if you are underweight, then I’d say gold is most certainly a “buy” right now, simply because I do not believe that the real gold bull market has even started yet, and any further dips in price that may happen will prove temporary and minor in comparison to the eventual gains. Why so?

Gold has gone up a lot since the 1999 nadir – almost four times to the peak at $1000 earlier this year. But, compared to other commodities, gold has been a mediocre performer – oil, for instance, went up by more than ten times over the same period. Copper, zinc, lead, molybdenum, uranium – all have outperformed gold.

So, why has gold been the “weak sister”? Well, it’s perfectly understandable if you regard gold as simply a “barbarous relic”, and a commodity like any other. Gold, as a material, is much less useful than all the other commodities listed above. Apart from filling teeth and adorning gangsta rappers’ necks, exactly what use is gold?

Emm … well, you can expend a tremendous amount of effort digging it out of the ground, then make it into bars and bury it again in an underground vault. Exactly.

Gold is money. At least, it used to be, before the impact of wars and vastly increased social spending made it inconvenient for the governments of the world. Since 1944, and even more since 1973, the role of gold as the underlying value behind the world’s money has been replaced by the US dollar, which is backed by … well, a lot of hot air, when it comes down to it.

And, where are we now? In the midst of the mother of all financial crises, centred on the USA, the only solution to which will be (in one form or other) massive money printing and currency debasement by the US government.

So, the reason to hold gold is because it is a store of value, perhaps (in future) the only reliable store of value that is no one else’s liability. Now, it may well be that the euro, or even the renminbi, eventually rises up to take over the dollar’s place at the centre of the world economy. But, there’s no guarantee of that (they’re only backed by hot air as well) and, in the interim, it is likely that increasing numbers of panicked investors will park at least a fraction of their portfolios in gold.

So, how to buy? Well, you can head down to your local coin shop, and there are online alternative like Goldmoney, but let’s assume you want an easy way to do it through your share dealing account. The one I hold lots of is the Lyxor Gold Bullion Security (GBS.LSE), which is backed by allocated gold bars held in HSBC’s vaults in London. Each GBS represents one tenth of an ounce, and the price as I write is $81.38.

The only problem with GBS is that, for some obscure reason, you are not allowed to hold them in an ISA or Child Trust Fund (GBS in a SIPP is fine). There are alternatives – one that I have held in the past (and is definitely ok for an ISA or CTF) is the Toronto and Amex-listed Central Fund of Canada (CEF-A.TO or CEF.AMEX), which also includes silver in its vaults.

Think of gold as insurance.