Gold has lost a quarter of its value in 2013 in sterling terms, and ended last week at $1,243.7 an ounce. It is now down 9.85 per cent over three years while the stock market is up 34.35 per cent.
Performance of indices over 3yrs
Source: FE Analytics
John (pictured) says that markets are reaching the end of their strong run and the macro-economic weakness of the world is likely to re-emerge in 2014, causing gold to begin a major up-trend.
"It’s a natural hedge against the world situation and we are likely to see a long-term bull trend," he said. "We could see $1,800 [an ounce] in the next 12 months."The analyst says that in the short-term it will be a recoil from risk assets that drives demand for gold. He adds his voice to a number of high-profile investors who have warned that the current market is looking over-cooked and due a correction.
However, he is also bullish on the long-term story for the metal, saying that China is key to its future.
The asset is highly prized in the country as dependable wealth, he explains, and is coveted by the emerging middle class.
This group is fully aware that the rhetoric of its government does not always match reality and can swing wildly, and this makes purchasing insurance, in the form of gold, particularly appealing.
"The rhetoric [of the government] can mean you are going to get volatility, so as China develops, their love affair with gold will increase," he said.
Another dynamic to be aware of is the floating of the Renminbi and the effect this could have on gold.
John says that the Chinese are well aware of the UK experience on leaving the gold standard in 1947, when sterling rapidly depreciated.
They may well be trying to ease their way into a floating exchange rate by building up gold reserves that back their currency.
"The Chinese government are continuing to buy huge resources of gold and could be creating their own gold standard for their own currency," he said.
This would help to dampen the fears of the Chinese population and would play to their cultural respect for gold as well as reducing the volatility of the currency upon flotation.
"They will say ‘our currency is backed by physical gold so the rate should naturally be higher’," he said.
A number of managers have suffered this year by maintaining a high weighting to gold as a hedge against default or systemic collapse.
The managers of the Ruffer Investment Company outlined their reasons for doing so in an earlier FE Trustnet article.
If John is right, Ruffer, Sebastian Lyon and others who have retained faith in the metal will be rewarded for their scepticism on the economic recovery and their belief that there are serious tail risks still out there.
One of these is the eurozone crisis, which John says will re-emerge over the coming years and is likely to have a dampening effect on markets.
After the German election, there has been a tautening of the rhetoric between France and Germany, which bodes ill for the months ahead.
"Fundamentally, the eurozone structure was produced on the basis at some point there would be unification of taxation and freer movement of labour. The reality is it isn’t going to happen and it cannot happen," he said.
John says there are only two possibilities for the eurozone: the first is that Germany decides to leave the euro, sick of paying a disproportionate amount.
The second, which is more likely, is that the zone splits into two, with Germany, Austria and the Benelux countries forming one currency zone and the southern countries forming a second, led by France, which would depreciate by around 20 per cent.
The prospect of a eurozone break-up is much less talked-about than it was a couple of years ago – ever since Draghi’s famous speech in which he promised to "do whatever it takes" to backstop the currency.
However, John says that it is a fantasy to believe that the currency union is safe.
"The market will decide at some point," he said. "And when it does, the euro will have to change or come to an end."
"The timing doesn’t matter once the world gets the idea the course is set."
The analyst says he wouldn’t expect a final rupture for another three to five years.
However, the rhetoric between Germany and France is starting to display more tension, he notes, with the issue brought into sharper focus by France having to carry out a massive amount of refinancing in the coming years.
The struggles of the eurozone will make sterling more attractive in the coming years, and John expects it to see a period of strength.
This is one reason why global managers and multi-asset managers are rotating more of their funds into this country, he explains.
The currency issue is one that will become more pertinent as the world starts to grapple with the eurozone crisis and the fallout from the huge amounts of quantitative easing [QE] in recent years, the analyst says.
Investors should pay special attention to whether their funds hedge their currency exposure – ECU is seeing an uptick in the number of portfolio managers searching for hedging services.
It is no coincidence that the best funds last year in Japan were all hedged – the country’s stock market appreciation has come on the back of currency depreciation.
Sterling strength will be a problem for British companies in the coming years, he says, but notes that the UK has a high proportion of "invisibles" in financial services such as foreign exchange trading, which will be insulated from the effects.