By Matthew Lynn
LONDON (MarketWatch) — Was the rout in the gold market this month the signal that the long-term bull market in the precious metal is over?
Or was it the kind of volatility you would expect in an asset that doesn’t have any intrinsic value, but is mainly held because investors have lost faith with every other investment?
The private investors might be heading for the exit, but the professionals are buying on weakness. Hedge funds and money managers significantly increased their holdings in the past week, according the Commodity Futures Trading Commission.
U.S. Mint Enlarge Image
So who is right? The professionals. If you step back from the day-to-day noise, gold /zigman2/quotes/210036712/delayed GCM23 +0.43% is still a long-term bull market. It has been rising in value for the last decade because of a deadly trio of long-term fundamental fractures in the global economy. Until they are fixed — and that is still at least another decade away — gold is still a core part of any portfolio.
Gold is traditionally sold as a bet on rampant inflation. If central bankers are determined to keep printing more and more money, and if bankrupt governments are forced to inflate away their debts, runs the argument, then gold, as the easiest available alternative to cash, should keep on rising in value.
In fact, that argument is looking more threadbare with every month that passes.
The great bull market in gold started in the early 2000s, and came against a backdrop of relatively low inflation. When prices were genuinely running out of control in the 1970s, gold didn’t do very well. Meanwhile, you’ve more chance of finding a job in Athens than you have any evidence for sustained inflation — it just isn’t there.
So the precious metal is not a great hedge against inflation, and there isn’t much of that around anyway to protect yourself against. That may well explain why at least some investors have started heading for the exit.
That would be a mistake. What gold really represents is a bet on economic chaos — and unfortunately there is plenty of that to come. The global economy faces three huge challenges — and each of them, when you look at them closely, are bullish for gold.
Euro-zone crisis faces up to new reality
Recent data showing the euro-zone slowdown spreading to Germany suggests that new tactics will be needed to counter the malaise gripping the region.
First, the euro /zigman2/quotes/210561242/realtime/sampled EURUSD +0.0089% is the most dysfunctional currency system ever created, locking what remains the world’s largest economic block into permanent depression. We have got depressingly used to the statistics, but huge chunks of Europe are going through a slump every bit as bad as that of the 1930s.
Greek unemployment rose to 27% this month, and for workers under the age of 24 it is now up to 60%. The economy is sliding into an abyss. In Spain, youth unemployment is up to 56%, a rate not seen since the days of General Franco, while overall 26% of the work force is out of work.
These are higher rates than the U.S. experience at the peak of the Great Depression (the rate hit 23% in 1932).
Why is that good for gold?
Because it means that central banks around the world will keep up their programs of quantitative easing. The U.S. and parts of Asia may recover some verve but so long as Europe is in crisis, growth will remain pitifully weak. More QE is good for the metal.