View more on these topics

The golden mean

Stewart Cowley, head of fixed income at Old Mutual Asset Managers, considers the heat death of the universe and the relation of gold to other investments to assess how far bonds can continue on their bull run

In a recent interview, cosmologist Professor Stephen Hawking revealed he had been asked, at a speaking engagement in Japan, not to mention the end of the universe in case it had an effect on the Japanese stockmarket.

Such is the fickle and irrational nature of humanity that it rarely looks past narrow, short-term interests to see the bigger picture.

In the spirit of perspective and with the knowledge that all good things come to an end, we have to acknowledge that the great bond rally will itself finish at some point.

If timing is the essence of good comedy, then it is most definitely the essence of good investing so let us ask some questions about when this could happen. To answer this, let us start in a strange place – how much gold would it cost to buy a house?

If you do that calculation, the combined effect of a rising gold price and falling house prices means that today, in the US and UK, the cost of a house has fallen from a peak of around 800oz to just 200oz.

Houses (if we are comparing real assets) have not looked so cheap since the late 1980s.

But this is not the whole picture. Let’s now ask how many barrels of oil an ounce of gold has historically bought?

It turns out that in the past you could have bought between 15 and 25 barrels of oil with an ounce of gold.

Assuming a constant oil price, that means that gold could reach $1,600. As it is currently $1,300 an ounce, this implies a 23 per cent return from here just from the normalising of a relationship.

Plugging these numbers into our previous relationship means that, in the none too distant future, you may be able to buy a house for 155 ounces of gold. Our gold/ house price relationship would plummet from its current value of 195 to unprec-edented levels. If you want to visualise it, that would be a piece of gold the size of a standard packet of butter.

If investors are so concerned about the debasement of the security of real assets to the extent that they would prefer to own gold at elevated prices, it certainly tells you something about the level of fearfulness.

If the three great achievements of human thought have been Darwinian evolution, quantum mechanics and the normal distribution curve, then there should, by rights, be some kind of reversion to the mean at some point.

If gold reaches the heights discussed here, then other assets such as houses and equities will look like attractive investments.

There is a lot of money locked up in the banking system from depository institutions receiving a pittance of interest.

We should expect that, if quantitative easing is embraced by Western central banks, even the current fever for bond investment will come to an end and money will seek a new home.

The leakage of money out of the central banking system and bonds into other assets (such as real estate and equities) will have a corrective influence on asset prices, bringing to an end the great bond bull run and sending yields to higher levels.

If a bond fund does not have the ability to achieve positive returns in a rising yield environment (by having a negative duration position), the capital losses will be tangible.

On current evidence, we are not there yet and the bond bull run may yet continue into 2011.

But having said that, the choices for investors remain stark – sell gold, sell bonds, buy real estate, buy equities and, as each day passes, that reality ticks ever closer, as does the end of the universe precluded from Stephen Hawking’s discussion.

Recommended

1

MP wants single body to regulate

Future regulation should be carried out by a single body under the Bank of England, with the regulator pleading for its budget from the Treasury select committee, according to MP Douglas Carswell. The Conservative MP for Clacton says such a structure would increase democratic accountability and would mean regulators face proper scrutiny over their budgets. […]

Treasury urged to scrap Pension Input Period

The Treasury is facing calls to scrap the Pension Input Period following its decision to cut the annual allowance from £255,000 to £50,000. Experts argue the PIP, the timescale HMRC uses to measure annual payments into a pension scheme, could be out of sync with an employer’s tax year. If that is the case, an […]

People on the move: Investment

Former Gartmore head of multi-manager Bambos Hambi has joined Insynergy Investment Management. He has taken up a senior consultancy position with responsibilities which include business strategy and product development. Fidelity global focus fund manager Brenda Reed is to leave the firm after 18 years. Reed, who has managed the £334m fund since January 2003, is […]

Concerns at triple lock for pensions

The Government’s triple lock on pensions, which will see payments rise by at least 2.5 per cent is “absurd”, according to the Institute of Economic Affairs. The lock, which was announced in June’s emergency Budget, will see state pensions rise in line with earnings, prices or 2.5 per cent, whichever is higher, from April. IEA […]

Healthcare regulation amalgamation predicted for Gulf states

While Dubai is leading the way in terms of legislating for expat healthcare in the Gulf, Qatar, Abu Dhabi and others are watching and learning – that’s according to Jelf International’s director of international services, Doug Rice. He believes the pace of change in the Gulf states will continue and that some level of unified healthcare system will be introduced across the region.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com