Gold Investing News

By Kishori Krishnan Exclusive To Gold Investing News

Niggling doubts have started to creep in - does gold have enough power to sally forth? Several researchers are revising their forecast and the bullish views are turning bearish. Can gold pull through?

The blaring headlines don’t help: `The yellow metal appears to have lost its lustre’; `Gold price appears to be facing strong headwinds’; `Investors are advised that they can find better returns in other asset classes.

What has brought on this turmoil? To understand this better, let’s take a look at the varied reasons being bandied around.

* The weak US dollar has been a major driver of this year’s surge in the price of gold. However, the currency has recently been showing signs of stabilizing, and could be about to turn upward.

* Risk aversion is gradually returning to pre-crisis levels and inflation fears should abate any time soon.

* The recovery from the deep economic crisis has been fast because of the stimulus measures backed by governments. It may not be sustainable in the long-term.

While many analysts suggest demand for gold would wane in the coming months due to the three factors outlined above, a new report from National Bank Financial Group has also given a contrarian view on the world’s most popular precious metal.

“Investors who dared place some of their eggs in gold in recent years have been nicely rewarded for what they did,” said Stéphane Marion, National Bank’s chief economist and strategist.

“However, the time has come now to revise their positions. If the past 30 years are any indication, gold does not constitute an attractive investment over the long term. Moreover, in times of economic recovery, the return on gold falls well short of the return on the stock market.”

Sorry to bring on the pessimists, but though investors have been happy to go with current momentum, some unease remains over the market’s fundamental picture and the extent of long positioning.

Monetary policy

There are other palpable reasons why the momentum will face a hurdle.

History shows that since 1988, the correlation between bullion and US inflation expectations is just 36 per cent, according to Goldman Sachs Group Inc. That means the price of gold rises and falls with inflation expectations 36 per cent of the time.

Moreover, though risk premiums appear to be falling at breakneck speed, analysts maintain the Federal Reserve and its counterparts around the world would not hesitate to tighten monetary policy if inflationary pressures mount.

Also, don’t forget, despite the structural challenges facing the US economy, the greenback appears poised to rebound on the strength of cyclical forces.

Analysts are also of the view that the price of gold is at its highest value, but the momentum indicator has not yet breached its previous high from this past February.

The momentum indicator seems to be suggesting that this latest move on the part of gold does not have the strength of previous moves and one should be on guard for a reversal.

Mining mess?

To understand why the bull run will probably run out of steam, one needs to take a look at the situation with the gold mining industry in South Africa (SA). One moot point: why are gold mines not able to derive much of the benefit from the higher price?

None of the top three gold mining companies in SA has returned cash to its shareholders over the entire 10-year bull market.

In fact, the mines have had to keep coming to the market to raise more cash.

For example, about 20 per cent of AngloGold Ashanti’s market capitalisation is made up of capital raised over the last 10 years.

Gold mines are struggling because of rising costs. Labour prices are relatively high. The stronger rand is also playing spoilsport and appears to be offsetting the benefits of the higher price.

More doubts

Coronation Asset Management portfolio manager Neville Chester adds his take. He maintains that gold has been the best-performing commodity over the past 12 months due to the “fear trade” during the global economic crisis.

“The average grade of gold per ton of ore has fallen to 3,5g from 5g more than 10 years ago, which is a 40 per cent deterioration. It is costing more to mine less gold in the rock,” says Chester.

BNP Paribas, too, has advised its investors about a substantial correction in the gold price. It says in its September-end metals report that gold needs to hang on to its current levels for a little longer “before we can start to think of another move higher”.

It believes there is more downside risk because of long speculative positions and a possible dollar rebound. BNP Paribas says gold investors are overextended - on the US Comex gold futures market, the speculative net long position is at a record high and while the exchange-traded funds have been quieter, their holdings are also at record levels.

Notes metals analyst at Société Générale in London, David Wilson: “Macro-wise, I can’t see any significant reasons supporting gold. The data seems to still suggest that we’re in quite a significant deflationary environment.”

Adds National Bank economist Matthieu Arseneau that gold “has acquitted itself well as a safe haven by outperforming the S&P/500 over the course of the past two recessions. However, it is important not to hold on to this investment for too long: Historically, the return spread has swung far in favour of the stock market in the two years following a market trough.”

From here?

So, when you want the answer to what’s in it for me, one advise: Don’t do it … Don’t invest in gold just because it’s popular right now.

For, investors often lose sight of longer-term historical investment results, especially during short-term periods of extreme volatility and trending markets.

Short-term, return-chasing investing is precisely what is driving this modern-day gold rush and that is exactly why you should be looking elsewhere.

Remember, bullion has no direct link to economic growth as do other commodities, doesn’t earn a return, offers limited hedging advantages and hasn’t kept pace with inflation. Moreover, the world’s biggest holders of gold, major central banks, aren’t overly eager to keep owning it.

So, why should you?