Our decision to tackle the emotive subject of gold, ahead of the other subjects on our list of pending publications, is a reflection of how important we feel the debate about gold is.  The yellow metal ignites arguments among investors and the public at large.  Lord Nathaniel Rothschild, at the time head of the London bank, N.M. Rothschild & Sons, said of gold, “I know of only two men who really understand the value of gold; an obscure clerk in the basement of the Banque de France and one of the directors of the Bank of England.  Unfortunately, they disagree”.  This quote sums up the difficulty of pricing gold, even to this day.

To some, gold is the ultimate currency and a true store of value.  To others, gold is a symbol of anti-establishment beliefs and an unnecessary distraction from the cut and thrust of today’s modern stock markets.  Over the next few pages, we will outline some facts about gold, concluding with Abbington’s own view of the yellow metal. 

David Fuller's view

Here is The Gold Debate from Abbington.

Some of you may have met Peter Van Dessel, who has been a subscriber for a number of years and is also a friend.  An investment manager in Ireland, Peter and his family moved to the USA about two years ago.  Abbington was co-founded with Grace Y Toh.  They will be at the Contrary Opinion Forum at Basin Harbor, Vermont at the beginning of September.  Peter will be speaking at the Forum, as will Eoin Treacy. 

What about gold?  Well, I share Peter’s views, not least: …”we believe gold has the ability to protect a typical investment book from the tail risks that are involved with global central banks’ monetary policies.”

Currently, gold is largely ranging in a choppy fashion (weekly & daily), which reflects the disagreement surrounding this market.  I believe this is base building, although that will not be confirmed until it is back above $1400 and finding support near that level.  Currently, it is being used as a play thing by HFT traders, so it is better to use the counterintuitive approach and accumulate gold on setbacks within its current range, rather than chase rallies. 

I maintain that the relative strength of palladium and platinum, mainly on supply concerns, is a bullish lead indicator. I do not expect similar supply concerns but gold will eventually become more popular with investors.  However, the Dow/Gold Ratio (historic & weekly) bottomed with the DJIA trading just below 6-times the price of gold as bullion peaked in mid-2011.  Today, the DJIA trades at near 13-times the price of gold.  In other words, the Dow is still outperforming bullion, as are many other stock markets.  This reduces the incentive to hold gold which is recovering more slowly.  Consequently, I would keep gold investments small until the Dow/Gold Ratio shows that gold is clearly outperforming.