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Behind the gold price rally

11 January 2010 Rezco Value Trend Fund

We are currently seeing one of the great rallies in the price of gold. “What is behind it,” asks Rob Spanjaard, the US-based member of the team which manages Rezco Value Trend Fund, one of the South Africa’s top performing unit trusts.

The gold price had a major rally in the decade from 1970 to 1980, rising from $35 per oz to over $700. It then did very little for the next 25 years.

At the beginning of 1955, the gold price was $35/oz and the S&P index was at 35. At the close of this year they are again almost equal with the gold price between 1100 and $1200/oz and the S&P at about 1100.

 (Click on image to enlarge)

Spanjaard says the graph shows how gold has performed as a financial asset. “This is what is driving the gold bulls. Gold has been monetized again. The inherent monetary value of gold rather than jewellery demand is driving the price. There are many investors who believe that gold retains its’ value even as governments resort to printing money to finance their deficits as they are now doing.

“An interesting aside, is that since 1955 there are three distinct periods of about 17 years of either gold outperforming or underperforming. The new gold cycle has just started according to this methodology.” Spanjaard however cautions against constructing laws of finance from such examples. “At Rezco we lean more to the view that we have the makings of yet another financial bubble,” he concludes.

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