Outlook still positive for gold – 3076

24th November 2010

In addition to the ongoing extreme economic problems worldwide, in recent days exemplified by the crisis in Ireland, gold has found support from the declining value of the dollar.

As a result central banks and hedge funds have diversified away from the greenback, seeking shelter instead hard assets, particularly gold. It is one of the major reasons for gold having had such a great ride this year.

There is plenty of evidence showing that gold and, in general, precious metals and commodities are an effective "event' hedge, a good bet in times of strife.

As Christopher Wyke, emerging markets and commodities product manager at Schroders illustrated last week at a conference in London, gold and precious metals were the only classes that provided positive returns during S&P 500's very worst months over the ten year period December 1999 and December 2009. Commodities, while not quite in positive territory, were the next ‘best performer'.

Another interesting metric highlighted by Wyke is that in terms of the average monthly return during the 10 worst falls in the S&P between December 1998 and August 2009, gold also proved to be a positive insurance compared say to the S&P 500 and the FTSE 100.

Commodities and inflation

As for commodities as a class in its own right and in relation to inflation, Wyke notes that it is the best performer by far in terms of annual returns versus stocks and bonds in a rising inflation environment (19.6% versus 2.1% for stocks and 6.1% for bonds).

Under stable inflation conditions commodities (10%) still top stocks (6.85%) and bonds (6.8%). Where commodities falter badly though is in an environment of falling inflation, with stocks and bonds returning 18.3% and 13.5% respectively but commodities experiencing negative returns of 10%.

Gold and rates

Wyke, speaking at Schroders International Media Conference 2010, also highlighted an interesting correlation between gold and real US short-term interest rates, with the gold price in general travelling in opposite direction to rates, appreciating in a low rate environment but falling in times of high rates.

Another important factor supporting the gold price though is supply constraints: the gold industry's exploration expenditure globally has increased dramatically in the last few years as it has become harder and harder to secure major discoveries. 

At the same time, the output of gold by the top four producers globally declined steadily between 1997 and 2007.

As for when to invest in gold, technical analysis by Wyke of gold spot and gold equity movements over the periods 1968-2008 and 1984-2008 respectively suggests that, historically, the best time of the year to buy gold and gold stocks has been the third quarter.

Bull run precedents

Finally, rather mouth-wateringly for investors, Wyke points out that the big gold bull run of the 1970s ended after a 2300% rise.

The current gold bull market has seen price rise to date of approximately 260%.

That, of course, is not to suggest that the current gold run will match that of the 70s but it does show that there are historical precedents for an extended and sustained appreciation.

Wyke's generally positive outlook for gold is echoed by others who feel that despite near-term headwinds, the upward trajectory of the gold price remains firmly intact. 

In recent days, a number of investment banks raised their price forecasts for the yellow metal. For instance, as reported here by Gold Alert, CIBC World Markets raised its 2011 and 2012 gold price targets to $1,600 and $1,700 per ounce.

Some analysts even believe it could hit $2,000 per ounce next year, as pointed out here by Money Morning.

Indeed the role of gold, which on November 9 touched an all time high of $1,424 an ounce as the market reacted to the Fed's $600 billion quantitative easing (QE2) injection into the US banking system, could become even more central to the operation of the world economy if World Bank president Robert Zoellick's recent surprise call for including gold in a new currency based on a basket of dollars, euros, yen and yuan is heeded.

SEE ALSO:  Is gold a bubble waiting to burst?

                     Links & resources for gold investors

                     Is this the next financial bubble?

12 thoughts on “Outlook still positive for gold – 3076”

  1. I totally disagree on your view on the SMP. First of all the SMP has more or less performed a large loss on the part of the private sector in bond holdings. ECB just has to sell back the securities it bought to the issuing countries at the price it bought them in order to implement a ‘haircut’ and ease the debt pain. More so if it enlarges it’s purchases.

    Apart from that, central banks do not target quantities, they target prices. The Fed does not announce a bond purchase program (though QE2 was a failed experiment of just that) but a federal funds rate. If the market thinks it can move it it can accept the challenge! The same goes for bond yields. If ECB wanted to set the yield curve on any of the PIIGS securities it can most surely do so with the help of the primary dealers. By doing that it would also minimize the default risk of the same securities since they would become close substitutes with reserves provided by ECB. In other words it can solve the crisis in 10 minutes with an appropriate announcement and subsequent action. The only real problem is that it does not regard itself as a fiscal agent of the Eurozone member countries, totally different than the way BoJ, BoE or the Fed handle things.

    1. Anonymous says:

      Hi Kostas

      I am afraid that “from that, central banks do not target quantities, they target prices” contradicts what you have said about the SMP as that is exactly what it has failed to do…Each price where it has intervened has as a minimum fallen heavily

      If we look at the current position where 4 of the members of the Governing Council are voting against further use of the SMP I think that there are problems with arguing that ” If ECB wanted to set the yield curve on any of the PIIGS securities it can most surely do so with the help of the primary dealers.”

      Could it do so? In theory yes. In practice the ECB may break up before it even got to starting a policy as I suspect that many more than 4 would vote against this and crucially they would be the representatives from the countries who in effect would be financing it.

      That is before you get to the voters in the various countries who are likely to wonder when they voted for a Euro bond?

      As you say at the end that route ends witha joint fiscal policy.

  2. Anonymous says:

    Top marks Shaun – you have hit several nails squarely on their heads. If I may take the case of Croatia – a “minnow” on the global stage, the Governor has received many plaudits from the international community for steering a good course through often tempestuous seas (much to the chagrin of local politico’s). Now he has said he will not seek another mandate and will leave the scene completely. In a way he is saying “damned if I do, damned if I don’t”. And I cannot blame him. It would be interesting to get feedback from Vasillis_101 in Greece and ExpatinBG to get their views on the local situation.

    1. Anonymous says:

      Greeks are in vacation in August. Discussions about the economy are forbidden.
      I’d say though that many people around the world feel vindicated and dare say happy.
      In Greece and elsewhere it is not spelled out but at the back of many minds I believe is that deepening of the crisis might bring fiscal union and Eurobonds (as bail outs of Spain and Italy are unthinkable) and it might be a blessing.
      Many Brits I see are very happy with the developments in Italy and Spain and hope now that the evil EZ will break down. They also see this as the natural consequence from too much socialism. The funny thing is that if you ask most Europeans they will say is the failure of capitalism.
      Readers of the Telegraph are happy with a collapse of European model based on socialism. Readers of the Guardian are very happy with what they see as collapse of capitalism. Generally, everybody happy at the moment as most people do not play in the stock market and have no money to invest. And as always (again and again the same mistake) they do not see an immediate effect in their lifes. It is August after all.

    2. Anonymous says:

      Bulgarian Government spending is under control due to very low official wages. The credit rating is stable. As a minnow within Europe, an externally triggered crisis is possible. Bulgarians are fairly self-sufficient in food when necessary and have experience at coping with financial crisis – the collapse of communism in 1989 and the 1996 hyper inflation.

      The Bulgarian national bank pegged the Leva to the DMark in 1997, so the
      Bulgarian National Bank has made the Bundesbank responsible. This has
      been good because Bulgarian politicians cannot influence monetary
      policy. Bulgarians have little faith in their own bureaucrats to manage a

      Vassilis –  Many people do not realize how awful a currency collapse could be. If the euro fails, Britain will be engulfed in the crisis. Europeans will suffer food shortages. Food affordability was a factor in the Arab spring.

      1. Anonymous says:

        I agree

  3. Drf says:

    “In good times the mystique is little damaged by by defeat as for example
    being overrun at the pass and forced to capitulate by currency markets
    in 1992 did not do a lot of damage to the Bank of England’s credibility.
    The subsequent recovery of the UK economy covered up the errors
    although it did for the thoughtful show a boundary where successful
    currency intervention becomes unsuccessful.”  Perhaps it is improved communication and particularly the widening internet which has made the difference? The conventional media are controlled to a great extent, but the emergent “free press” on the internet are not. It is no longer so easy for politicians and Central Bankers to cover up their errors and incompetence, particularly in times of financial stress.

    The root of these problems however is surely that Central Bankers at the highest level are appointed under the auspices of politicians. As such they are always ultimately obliged to obey the wishes of those politicians when the chips are down as a form of nepotism; this exposes the true absence of any real “independence”!

  4. Bkester says:

    But what was the Swiss National Bank supposed to do? Sit back and watch the Franc hit parity with the Euro?  Do nothing as Swiss industry (which has hardly got a low cost base to start with) gets wiped out of key markets in Europe and America? At least they gave it a shot. Aren’t we back to Ray Fletcher’s “damned if you do, damned if you don’t”?  Are we going to blame Bern politicians and Zurich bankers for America’s debt excesses and the creation of the monetary Whore of Babylon a.k.a the euro? So for running an efficient economy, keeping debts under control and keeping taxation in check, the Swiss Government and SNB are now accused of incompetence and interference because, frankly, they’ve been too successful in a world that financially rewards other failed bankers.

    1. It is exactly a “damned if you do, damned if you don’t” situation. In such cases the simple analysis is that it is always the weak who give in to outside pressure to DO and only the strong who DON’T.
      The only reason to engage in an exercise in futility is so that you can pass the buck, claiming “I’ve tried my best”. That certainly avoids short-term criticism but at the price of damaging of your long-term credibility. Only a weak leadership will view that as a sensible course of action.
      I think Shaun is perfectly correct. Central Banks losing their credibility will make resolving this and future crisis much harder.  

  5. Hi Shaun,
    Do you have any thoughts on future commodity prices?
    Do you think there will just be a slight downward correction or is a major crash in prices possible?

    1. Anonymous says:

      Hi Mark

      I wish I knew! Actually more seriously I do not want to know the future as everything would then be boring would it not? I am afraid that it seems incredibly unlikely you could pick and choose the bits you would know.

      On the subject of oil prices my chartist friend suggested 2 or 3 weeks back that the oil price could fall in his opinion to around US $70 per barrel but he was away last week so I couldnt find out any more.The way things developed last week it came more into play as oil dropped but we will have to see…

  6. Mac says:

    If you run a FIAT currency system with no real collateral
    isn’t it all down to sovereign confidence how well that currency performs? 

    I think Drf is correct that ease of access to wholesale media
    makes that needed confidence more easily tested and any chinks in the armour
    are remorselessly seized upon. 

    Clearly the lack of any sort of vision what-so-ever  in either the political class or the BoE is
    worrying for everyone, not just the dreaded speculators! 

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