“Everything dies baby that’s a fact/ But maybe everything that dies someday comes back”
-Bruce Springsteen, “Atlantic City”
For investors with exposure to gold, today is one of those days when the markets seem a lot like an Atlantic City casino, and the house is winning.
At press time, the spectacular fall of gold was weighing heavy again on the Toronto Stock Exchange. If you didn’t catch the headlines, a cursory glance at the exchange’s heaviest traders would suffice. Names such as B2Gold (down 10.4%), Barrick (down 10.37%) and New Gold (down 15.78%). were leading the way down.
The recent selloff in gold is now reaching historic proportions, and making headlines around the world. Today’s 7% drop, when tacked on to Friday’s 5% dip, represents the worst two days for gold in thirty years. This is not something investors in the yellow metal are very used to of late. For more than a decade, gold has enjoyed an unprecedented run as investors flocked to the metal, believing it to be a hedge against various political, economic and currency crises.
This, of course, affects Canadians more than most because the TSX is more heavily weighted with gold companies than most any other exchange in the world. Gold has been for rising so high for so long that many have forgotten the most fundamental tenet of the markets: they’re cyclical.
But it’s not like no one noticed this coming. Some of the most respected voices on the street have been warning of this day for at least two years.
Economist Nouriel Roubini says gold is not doing well because it isn’t an asset that performs well in today’s prevailing environment, one in which inflation is less of concern that it has been in the past, and the instability that was the European debt crisis has faded.
In a recent interview, Roubini wondered aloud: “What’s the return on gold? Just the price appreciation. It doesn’t have any dividend or coupon, gold. It is just the price appreciation that drives it and unless you have an extreme event like inflation or a global collapse gold is not going to do well..”.
Roubini’s words echo those of Warren Buffett. But the “Oracle of Omaha” has even more disdain for gold than Roubini. Buffett, in 2011’s annual letter to investors in Berkshire Hathaway’s annual report offered his now famous view of gold’s appreciation.
“This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.
The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.
What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.”
So has the music has finally stopped on gold? That will be a matter of much debate in the coming weeks. But on the TSX, things are already changing. The exchange’s top performing sector in 2012? Technology.
“During 2012, the technology sector experienced a resurgence in Canada.” said the exchange in a January press release. The top 35 technology issuers, ranked by market capitalization at December 31, 2012, had an average share price appreciation of 31% in 2012. More than half of these companies saw their share price increase by over 20% and only seven saw their share price decrease in 2012.”
If you follow the Canadian tech sector closely, however, you will realize there is one problem: a full sector rotation -investors raising the white flag on resources and piling into tech- is probably unlikely, because there are so few listings. And no rational tech supporter thinks we are quickly headed back to the days of 1999-2000, when the tech sector accounted for 41% of the value of the entire exchange. But the other extreme, a tech sector that last June accounted for just 1.6% of the value of the TSX, looks equally untenable.