Gold has been fabulous during 2010 with many clients wondering how they can gain exposure to the commodity – either directly or otherwise.
It’s been time to follow up the Perth Mint to see what they have to offer vs checking out various stocks on the ASX who have direct exposure to Gold and mines. Can Gold make it to $US 1500/oz? It seems many think so, but it may just run out of puff too. So now that it’s had a stellar run… is it time to jump in? or get off??
I recently read of one long-term gold sceptic who, although no richer for watching gold go from $US 1061/oz to over $US 1400/oz in 2010, still sees no reason to change his more pessimistic view on gold as in investment. The ‘Emperor is still naked’ as far as he’s concerned and for the following stated reasons in a recent Eureka Report:
Proponents of an ever-higher gold price are generally believe in some form of future financial catastrophe. The argument being that gold will provide protection against rampant inflation & deflation, sovereign risk and/or the possible degradation of paper currencies. The latter argument has become increasingly popular recently as the Fed supposedly sacrifices the value of the US dollar via a 2nd round of QE – quantitative easing and the viability of the Euro is challenged by the dire position of some of its economies.
As the gold price is highly correlated with the inflation rate, the best argument for gold is that it acts as a hedge for inflation. Technically true! Theoretically, nothing compromises the value of currency more than inflation. The problem investors have is that theory’s not currently panning out. While the USD gold price has tracked US inflation fairly closely in the past, this hasn’t been true more recently. Outside Australia – where currency is appreciating in the face of high inflation – core inflation is struggles to register. Regardless of the amounts of money printed, Mr Hawkins doubts whether this will change materially over the coming years. He states:
- “To be inflationary, low interest rates and/or quantitative easing must have a clean transition through to the real economy. For this to occur, the banking system needs to be healthy and willing to lend and potential borrowers confident. Clearly, we are still a long way from such an environment.
- Despite generally tight commodity markets, excess capacity is still a dominant theme in most global product markets. In combination with China’s ongoing strategy to rip market share out of the rest of the world, there is little to suggest that a cost-push inflation surge is imminent.
- While inflation is barely visible in the developed economies, it is highly visible across the emerging economies and most commodity markets. It may well be the case that the liquidity created by the Federal Reserve is flowing into emerging markets and exchange-traded commodity markets; however, such trends are ultimately self-defeating because rising commodity prices – particularly food and energy – are immediately met by policy tightening.
- Once unemployment rates are trending down and/or the demand for credit is improving, monetary policy in the US, Europe and Japan will tighten.”
He further asserts, that in the absence of a significant pick-up in inflation, there must come a point where the opportunity cost of owning gold prompts the investor to finally liquidate their holding and use proceeds for assets which are now relatively cheaper. Until inflation is prevalent, there are other investments out there worth considering. I’m not convinced that Gold has the long term legs required either, for all the preceding reasons. There’s been plenty of bubbles in the market in the past, and maybe gold will be another in the future – only time will tell. Please let us know if you’d like to explore some alternate options that suit your personal goals and objectives…