The latest Commitment of Traders Report (COT) from the U.S. Commodity Futures Trading Association made for interesting reading. As of September month end gold long positions have been reduced to the lowest level since March 2009, recording a 20% drop from the high of August. This indicates the resent blow off in the gold price was sufficient to take the speculative fervour out of gold’s recent rally, which saw gold reach $1,900 per ounce. Today’s price of $1,657 is proving attractive as prices have so far increased 2% since Friday. Physical demand for gold bullion is proving robust especially with the backdrop of negative news out of Europe; Equity markets from Asia (Nikkei Down 1.7%) to Europe (FTSE Down 2%) are down sharply. The expectations for the U.S. are for a lower market opening.
The news out of Greece has gotten dimmer and dimmer. The Government has acknowledged, what many commentators have previously said was a certainty, that Greece will miss the austerity targets for 2012 as set forth by the Troika, and added the caveat that the news may get worse again by December. The issue seems to be that growth will be impeded due to recessionary pressures. One wonders how modern economies, that have been spoon fed cheap credit for so long, are expected to grow when the availability of credit has become so severely limited. If debt forgiveness on an enormous scale, indirectly via currency devaluation or directly via straight write off, is not considered then the bad news will continue and spread to other countries.
Given the recent moves in the gold price GoldCore has produced a selection Q&A from recent client and media interviews.
Regarding the tensions in the price of gold (economic uncertainty and inflation risks) versus the weak growth forecasts that have led to a more recent sell-off across commodities. Which of these forces will ultimately prevail and where does the balance lie?
Gold’s price has risen in proportion to a rise in the perception of risk throughout the world economy. Gold is seen as the quintessential “Canary in the Coal Mine”. As the world economy integrates further and further you will likely see gold prices move higher until a stage where political leaders can develop methods and institutions that can manage the trade imbalances and economic crisis’s of the future. Gold will fall when risk falls, and rise when risk rises. Inflation can be a form of taxation and in many cases is brought about by inappropriate monetary policies; artificially low interest rates, printing of money etc. – as this adds risk and hampers growth, so gold tends to rise with inflation.
Why should investors invest in gold today?
Lord Rees Mogg said it better than anyone, “Governments lie; bankers lie; even auditors sometimes lie: gold tells the truth.” In a way you are reducing the human risk from the natural economic cycle. Economic history is littered with the frivolous and often disastrous decisions of politicians, gold hedges to a degree the “human” risk. I think the last 5 years illustrates this very well. The capital markets tend to price assets efficiently over time and an investor should seek to have a portfolio of diversified assets. Gold is not an investment in the traditional sense as it has no yield (pays no dividend, has no interest rate), it is a very rare and thus a precious piece of metal. It is more valuable for what it is not then what it is; it has no liabilities, it is controlled by no one, it cannot be printed and abused by politicians. As such it is the ultimate store of value and thus is akin to a super currency. A small allocation (at least 3%) to gold can be very useful when the markets sell off.
What makes gold so important in volatile times?
High market volatility is driven by a general uncertainty as to future economic outcomes. Investors want a yield on their investments and when that yield is threatened they may seek to reduce exposures and in most cases to convert to cash, bonds and to a degree gold. Gold is sought after because cash can be printed and therefore devalued, gold cannot be debased so easily.
Is there a bubble or the danger of a bubble when it comes to gold? If not, why not.
The short answer is no one knows. Every day over seven billion people, all over the world, wake up and go through their daily lives buying and selling products and services, the net result of this activity sets the price for oil, gas, copper and gold and other commodities. The gold market is enormous and very efficient in terms of its trading mechanisms. It is important to note the following; most people in the developed world do not own gold, in fact if you were to ask a random selection of people in any western city how many people actually own gold as an investment the answer would probably be very, very few. At some point gold may go parabolic, when that will happen is very difficult to say, but the factors surrounding such a move will likely involve universal adoption of gold by the general public, a far cry from where we are today.
The price of silver has been extremely volatile over recent days. Why?
Gold is seen more as a long term investment then silver. Silver rises and falls on gold’s coat-tails and has twice the volatility of gold over the longer term, yet similar returns. Because of its price volatility it is seen as attractive to speculators who have a more short term outlook. Thus it gets bought aggressively and sold aggressively.