What follows is an entirely fictitious account of a debate that never happened, but probably should have!

It was a warm night in mid December, and the Amphitheatre was filled with asset managers, market traders, economists, bankers and journalists, as well a huge contingent of finance students.

They’d come to listen to the Great Gold Debate of 2014, featuring five of the worlds most prominent finance and economics professionals, all of whom had varying attitudes towards the yellow metal, and differing outlooks for the price of gold in 2015 and beyond.

On the stage, the following members were busy arranging their papers, adjusting their microphones and having a sip of water – anxiously awaiting the commencement of proceedings.

First up was CON-FUSED: CON-FUSED kindly offered to moderate the debate for the night. Whilst this was seen as magnanimous, in reality he was relieved. He simply couldn’t make sense of what was going on in the world, and the seeming disconnect between economic reality and what was going on with global asset prices in the ‘post GFC’ world. He wished he were as confident of how things would turn out as CON-VICTION, a last minute withdrawal from the debate. CON-VICTION was 100% sure of himself, and had margined his stock portfolio to the maximum, with a heavily levered long exposure to the SP500.

CON-FUSED suspected that if more people were being honest with themselves, they’d be in his camp too!

CON-SENSUS was on the stage too: CON-SENSUS had a miserable track record as an investor. He rarely did any thinking for himself, and instead was very happy to follow the crowd. He’d bought Japanese stocks in the late 80’s, and bought into a technology fund that a ‘leading’ wealth management firm launched in 2000, to ‘capitalize’ on the internet boom. 15 years later that investment is still down 50%, despite the world changing advances in tech that have occurred in the past several years. Despite his track record, most people believe CONSENSUS is incredibly wise, and he dominates traditional thinking and both retail and institutional investor portfolio allocations.

Next up was CON-DESCENDING: CON-DESCENDING immensely dislikes gold, and has done his entire professional life. He had always considered gold to be a ‘barbarous relic’, and was one of the Wall Street analysts predicting a USD $60oz for the gold price in August 1976. CON-DESCENDING was also fabulously wealthy, as he had successfully lobbied the government to force every private citizen to hand over 10% of their annual salary to him, which he then managed. That business now pays billions a year in fees, though he has failed to match market returns.

CON-DESCENDING has a pet dog called Maynard!

CON-SPIRACY was also on stage. CON-SPIRACY is incredibly bright. He’s always looking under the bonnet and below the surface, and doesn’t accept anything at face value. For him though, physical gold is in many ways as much a political statement as an investment asset.

Whilst he frequently mocked CON-SPIRACY, CON-DESCENDING was secretly glad he was there, because he could poke fun at him and paint anyone who was bullish on gold or thought it at least deserved an allocation in investor portfolios as a CON-SPIRACY theorist.

The guy he really didn’t like was CON-TRARIAN. Like CON-SENSUS and CON-DESCENDING, CON-TRARIAN had spent the majority of his professional life in wealth management too, but he was a bit of a lone wolf.

He’d been bullish on gold for about 10 years, and had long agitated that it should be part of every investor’s portfolio. Despite the pullback in gold prices in 2013, it remained the largest position in his own investment portfolio, not that he advocated that large an allocation for everyday investors.

He had a soft spot for CON-SPIRACY, though he was hoping he wouldn’t make his job any harder that night, as he often did.

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Just before the debate began, there was a slight commotion towards the back of the room, as an exceptionally old and wizened looking Chinese man shuffled into the Amphitheatre. He struggled to his seat, and pulled out a pipe, which he began to smoke.

A young student next to him was going to ask the old man to put the pipe away, but he was captivated by the fierce intelligence burning in the old man’s eyes.

Instead, the young student asked the man why a person of his advanced years would bother to attend a conference like this, and what he hoped to learn from the event.

“Real knowledge is to know the extent of one’s ignorance,” muttered the man, without taking his eyes off the stage.

With that - proceedings got underway!

CON-FUSED turned to CON-SENSUS, asking him “Lets start with your views on gold as we enter 2015”

“I’m bearish for three main reasons,” stated CON-SENSUS. “Everyone knows the USD is on the verge of a multi-year break out, and it will strengthen substantially in the years ahead. Gold never does well when the USD rallies. Not only that, but the equity market is set to go from strength to strength, with nearly everyone predicting the bull market has further to run. Finally, there is no inflation anywhere in the developed world, and everyone knows gold only goes up when there’s high inflation”.

“I’d like to add to that if I may” interjected CON-DESCENDING. “Gold has fallen 35% since 2011, whilst the equity market is back above its pre GFC highs. We should have trusted central banks all along; they know what they’re doing. Gold has no role in investors portfolios, and is just another commodity”.

CON-SPIRACY, visibly upset, couldn’t help but interject. “That’s paper manipulation. Everyone knows the paper gold market is controlled by big banks and they constantly manipulate the price down”

CON-DESCENDING sniggered “Sorry – if they constantly manipulate the price down why has it gone from USD $250oz to USD $1200oz in the past fifteen years”, which was actually a very fair point.

At this point, CON-TRARIAN entered the fray. “I actually agree with you there CON-DESCENDING, but did you not just acknowledge gold has gone up by nearly 500% in the past fifteen years.”

“Yes.” CON-DESCENDING said. “So what?” “Well correct me if I’m wrong, but that’s a much stronger return than equities, property, cash or bonds over that period. It’s also uncorrelated to equities, so it’s severely reduced overall portfolio volatility” – CON-TRARIAN stated

“But that was because Gold Bugs were fearing hyperinflation and a collapse of the USD” stated CON-SENSUS, repeating a critique he’d read on Bloomberg that day.

CON-DESCENDING nodded his head furiously reiterating his comment that we were wise to put all our faith in central banks and their current monetary policy settings.

CON-FUSED decided to move things along and asked CON-SPIRACY about the recent fall in the price of oil, and how that dove-tailed in with his view on inflation and gold.

“Everyone knows the big banks are manipulating the price of oil down to hurt Putin, because the Russians rely on oil and gas for their export earnings. Putin is also planning to back the Ruble with gold, so that’s another reason Western Powers are pushing oil and gold lower” stated CON-SPIRACY.

CON-TRARIAN took a deep breath, patted his friend on the shoulder, and directed a question to CON-DESCENDING. “Mate, earlier you stated gold was just another commodity. I’m keen to get your perspective on why the gold price is flat in 2014 whilst oil has plunged the better part of 50%. If gold is just another commodity why hasn’t it sold off aggressively too this year.”

“It will head below USD $1000z in 2015 and stay there” stated CON-DESCENDING, not answering the question at all.

“Besides which, Gold doesn’t pay any income – investors need income” stated CON-SENSUS, repeating something he’d seen mentioned plenty of times in the past two years, justifying his bearish posture

“But gold has never paid an income” stated CON-TRARIAN. “That still hasn’t stopped it rising from USD $35oz to USD $1200oz in the last 40 odd years”.

“Exactly” claimed CON-SPIRACY “You need to get an income on your FIAT money because the Fed and other central bankers print it out of thin air”.

“Well that’s not quite where I was going with it,” stated CONTRARIAN, “I just think it’s a little one dimensional to dismiss gold as an investment because it doesn’t pay an income”

“Lets move along shall we”, said CON-FUSED. “One of the things that has been very interesting in the last few years has been the explosion of gold demand in China – what do you think about that CON-DESCENDING”

“Well from what I understand that is mostly gold jewelry. That’s not an investment,” said CON-DESCENDING.

“But over 80% of Chinese that have been surveyed on this state that they see 24k gold jewelry as an investment as well as an ostentatious display of wealth” said CON-TRARIAN, “much like they do in India”

“Madness” said CON-DESCENDING “Sophisticated Western investors know that you only buy gold if you think the world is going to end – you know – the gold and guns crowd”.

“I own a gun,” said CON-SPIRACY – which got a bit of a laugh from the  crowd

CON-TRARIAN, who thought the previous comment was a little strange, said “I just noticed something CON-DESCENDING, you have a lovely ring on your finger there, and a rather thick chain around your neck. – What are they made of?”

“Gold” said CON-DESCENDING – “so does CON-SENSUS and most of the people in the room tonight – so what?”

“And did you get that ring on your wedding day, and give something similar to your wife too?” CON-TRARIAN asked

“Yes of course, she loves GOLD jewelry – again, SO WHAT” – said CON-DESCENDING

“Well I was just wondering” said CON-TRARIAN, “doesn’t it seem a bit CON-VOLUTED that on the one hand, on the day you got married, both you and your wife chose to adorn each other in physical gold jewelry – as a symbol of love and fidelity. Yet at the same time you say you only buy gold if you think the world is going to end.”

“That’s irrelevant,” said CON-DESCENDING “and don’t bring my wife into it, we’ve been married fifty years”

“Congratulations” said CON-FUSED “I hope you bought your wife something nice to celebrate – don’t they call that a GOLDEN wedding anniversary”

“Yes,” said CON-DESCENDING, “I bought her some jewelry”

“What did she buy you?” asked CON-SENSUS

Tickets to the Olympics – she paid with her GOLD credit card” – said CON-DESCENDING “I can’t wait to see Usain Bolt run – he is amazing”

“Yes – I think he has won six GOLD medals already hasn’t he. I’ve always wondered why we give GOLD medals as a symbol of the highest possible achievement to our greatest champions” said CON-FUSED, before changing tack a little, asking CON-SENSUS about recent reports Russia was selling its gold.

“Yep – that’s what I read on the front page of the newspaper. I only saw the headline but that’s what looks to be happening. Makes sense. Smart move” said CON-SENSUS.

“Central Banks are doing the right thing managing their own currencies and economies using QE and ZIRP” said CON-DESCENDING “They should all be selling gold to buy more government bonds. Gold is a 6000 year bubble and is nothing but shiny Bitcoin – Willem Buiter from Citigroup has just completed some research indicating this”

“One wonders what he’d have compared Gold too 5 years ago. Based on his logic, in 2009 it was a 5,995 year bubble and Bitcoin didn’t even exist then” stated CON-TRARIAN

“Exactly,” said CON-SPIRACY. “These bankers should not be allowed to buy government bonds with printed money. That’s a ponzi scheme. They should all be buying gold instead”

“That is very shortsighted,” said CON-DESCENDING “Central Bankers are the most Connected people in the world of modern finance. Gold no longer plays any role in the modern monetary or financial system, so it would be a waste of their resources buying gold. Sell it all I say and invest in productive assets”

“The Russian central bank wouldn’t agree with you there – because despite the rumours – they aren’t selling gold – they’re buying more.” Said CON-TRARIAN “And it’s not just them. More broadly, central banks on aggregate have been buying hundreds of tonnes of gold a year since the GFC hit”

CON-SENSUS was a bit surprised at that, as that wasn’t generally headline news, though he had seen a headline a little while back regarding Alan Greenspan and Chinese central bank gold, and he had a vague recollection of some Dutch gold repatriation story.

In truth though he’d been too busy loading up on his short US bond position - because he read an article that said 100% of economists surveyed at the start of 2014 were convinced yields would rise.

CON-DESCENDING on the other hand was having none of it “Central Bank are terrible market timers – they were selling gold in the late 90’s when gold bottomed”

“If they’re terrible market timers – should we give them the kind of cart blanche Control of the financial system we have?” asked CONFUSED

“Actually” said CON-TRARIAN “they were selling gold from the mid 80’s onward – what happened when the GFC hit was a change in a 20 year trend. Besides – didn’t you just say they are the most connected people in modern finance”

“Yes,” said CON-DESCENDING “And your point is?”

“Well – I was just wondering,” said CON-TRARIAN “These people are as you say – the most connected people in modern finance. We have empowered them to literally print money and set interest rates for our economies. And they are buying gold. Lots of gold! Isn’t there a saying about actions speaking louder than words – if its good enough for them, isn’t it good enough for everyday investors”

“That’s because owning gold is a tradition,” said CON-DESCENDING “Sophisticated investors don’t do it. What are you worried about – that sovereigns can go broke? That can’t happen with a FIAT currency – they can print all they like”

“The bigger central bank story is the repatriation requests European central banks are making. The Germans and the like are trying to get their gold out of America, and they can’t - because it’s all gone,” said CON-SPIRACY

“So you’re saying all the banks and custodians and auditors and central bankers etc. are lying to us and engaged in a massive fraud?” asked CON-DESCENDING. “That’s a wild set of allegations”.

“Lets leave that aside shall we for now” said CON-FUSED. “CON-TRARIAN – what do you think of the repatriation stories”

“Well” CON-TRARIAN stated - it seems pretty obvious central banks understand that gold is going to play an important role in the banking and monetary system going forward – though we can’t be 100% sure what that will be. I can’t imagine any other reason for them to repatriate gold holdings – they could just sell it in London or New York if they no longer wanted to hold it and thought it was a useless asset as some claim.”

With time fast running out, it was time for final comments. “Lets wrap it up then gentleman shall we”, said CON-FUSED. “Can I get a quick summary of your outlook for gold and a guide as to how much you should have in your portfolio. Let’s start with you CON-SPIRACY, then move onto CON-SENSUS”

“100% allocation and a USD $10,000oz price tag by end 2015 – hyperinflation is coming and Japan will collapse. In the long run there’s no relevant price as the US Dollar will end up on the dust bin of monetary history,” said CON-SPIRACY

CON-SENSUS was next up. “Well, as I said earlier, I’m bearish – I see the USD rallying alongside equities as the US economy continues to strengthen. Russia will sell its gold and inflation is low. The Fed will also hike interest rates. I suggest a 0% allocation now, and think the price will hit USD $900 next year. I’ll change my view when inflation takes off and if price goes above USD $2,500oz”

“It’s a 0% allocation now, tomorrow and forever,” said CON-DESCENDING, without even waiting to be asked. “I don’t even look at it when I put together investor portfolios – we stick with bonds, property and cash and some other stuff that’s often illiquid, expensive and highly correlated to the first three”

And you CON-TRARIAN asked CON-FUSED. “Well I’ve typically recommended, remembering of course we can’t give advice, that investors would do well holding between 10 to 25% of their assets in gold, and that it plays two roles in your portfolio. The first 10-15% is for insurance and as a diversifier. But it is also an asset that does have the opportunity, though not the guarantee of having an exponential blow off top, like the late 1970’s, which could be highly profitable. An allocation like that has worked well for the last 10 years – and the numbers stack up since 1971 as well, right back to the time gold and money were still formally linked. I still see that as a fair, balanced and prudent way of going about things for everyday investors”

As the CON-VENTION (pun intended) ended, attendees began filing out of the Amphitheatre. The young student in the back noticed that the old man next to him hadn’t moved yet, and he politely waited for him to finish his pipe.

He was curious though of what the old man was thinking, so he asked “Excuse me sir, what did you think of the debate tonight”.

The old man put down his pipe, and slowly turned to look at the young man. For a long while he said nothing, thinking of what would best capture his thoughts on the matter.

Finally, he smiled, patted his new friend of the knee, and said “Young man, study the past if you would define the future”

Merry Xmas to all of you

Wishing you and your families love, laughter and a prosperous 2015

Disclaimer

This publication is for education purposes only and should not be considered either general of personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, past performance is not necessarily indicative of future performance. Any prices, quotes or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness. This report was produced in conjunction with ABC Bullion NSW.