Is this a standard gold rush or simply a flash in the pan?
Last week GoldMadeSimple.com were featured in the Times Newspaper, they ran a special feature on the gold market. Please read below the artice, written by Peter Archer.
Gold is testing new highs as investors increasingly view bullion as a safe haven. Peter Archer asks a panel of experts why gold is no longer a four-letter word.
Its market classification might mark gold a commodity but this enduring precious metal is also a word currency.
The relationship between gold and the trading of paper money is as complex and uncertain as the foreign exchange markets themselves. However, there are discernable trends or at least pointers to the way printed currency and gold interact.
Lisa Baum at Cantor Index says: ‘Historically gold has been a slave to the dollar, and although there is still a strong negative correlation, recent behaviour shows it cannot always be predicted in that way
‘As the dollar weakens, gold tends to become more expensive. But in recent months as the dollar has been recovering, the gold market has held up surprisingly well. We can attribute this to investor’s faith in the yellow metal, which is often used as an asset in times of uncertainty.
“If we were to experience hyperinflation, gold would still be precious while we were throwing paper money out the window”
Jason Cozens, chief executive of Gold Made Simple ®, says: “With central banks eager to print their way into recovery, gold is now considered to be the only currency safe from inflation.
The sluggish economic recovery in Europe and the United States has provided encouragement to slow moving investors to back gold as doubts grow over the ability of the major currencies to hold their value. With the financial markets still prone to volatility, investors remain cautious and are including gold as part of their portfolios as it is the ultimate store of value.
According to David Jones, chief market strategist at IG Index and author of spread betting the forex Markets: ‘In the earlier part of this decade the weakness of the US dollar was a big driver of the initial strength in gold and this relationship still holds true.
‘Gold will usually benefit from a slide in the dollar but this needs to be weighed up against other factors such as how much uncertainty there is towards other asset classes and the global outlook for inflation.
The current experiment with so called flat currencies- that is faith based paper, backed by a promise from government- has been running for 40 years, since US President Richard Nixon severed the dollar’s one remaining link to the Gold Standard.
David Morrison, analyst at GFT, says, “Despite what governments and central bankers would like us to believe, gold is not irrelevant. They just don’t want their citizens depending on it at the expense of the paper currencies.
“People who hold gold do so for protection. Precious metals are a store of value. If you go back to the 1930s when one ounce of gold could be exchanged for $35, you could buy a good suit for $35. Now you can still buy a good suit for an ounce of gold. But $35, even with compound interest, won’t buy you a pair of Levi’s.”
The last major gold boom was during the 1970s through to the beginning of the 1980s, when its price pushed towards $900 an ounce.
David Jones says: “Probably the main reason for investors deserting it as an asset was the boom seen for stock markets through the 80’s and then, after the 87 crash, the continued equity growth in the 1990s.
“With stock markets offering such seemingly steadily healthy returns, many saw gold as an outdated mode of investment or hedge against speculation and had the attitude of ‘why bother? When other assets offered better returns.
“This all changed, of course, when stock markets topped out in early 2000 and gold once again came back into favour, which has remained the case right through 2010”
Gold is currently not far off its all-time-high price approaching $1,220 an ounce, achieved in December 2009. Whether this represents value remains to be seen, according to Mr Jones.
He says “The uncertainty of the financial crisis provided another fillio for precious metals but, if economic recovery continues and stock markets remain on a firm footing, investors should be prepared for the distinct possibility that gold could well find itself unloved once more. “
Lisa Baum says: “since the UK sold 400 tons of gold in the 1990s, at the bottom of the market, the price of gold has sky-rocketed. It’s no secret that this badly-judged sell-off lost the UK around £2 billion. The price of gold has been creeping higher and higher ever since and, while the Asian markets still have an appetite for it, gold will remain undervalued, especially in times of uncertainty for Europe and America.
“It’s a safe haven and a safe bet against inflation. The only thing which could reverse this trend, in the short term, would be if the Asian markets lose interest and begin to diversify in other ways. That said, while the Greenback and the euro remain deep in uncharted territories, this is highly unlikely.
“When India bought 200 tons of gold from the International monetary Fund (IMF) in November 2009, it was a historic movement by a central bank of diversify in this way. However, it is commonly estimated that 15 per cent of the current price of gold is speculation upward trend we have seen over the last few years. “
David Morrison says: “In 2009, for the first time in more than 20 years, central banks were net buyers of gold bullion. Interestingly, developed economies, mainly via the IMF, were sellers. But the central banks of emerging countries were happy to buy everything on offer. India, China and Russia were all big buyers. Why? Because they are desperate to diversify their foreign-exchange reserves out of dollars in particular.
Jason Cozens concurs: ‘The emerging markets are growing at an astonishing rate, but are rightly concerned about the value of their US dollar reserves. In order to secure their capital, these economies are building up their gold reserves to preserve wealth and hedge against devalued paper money.
A note of caution should be sounded. If economies continue to show signs of recovery and stock markets rebuild on the foundations of the past 12 months, gold’s momentum could be significantly slowed as investors recover their appetite for risk and look for other asset classes.
Also, gold is a liquid asset and investors can sell if they get into trouble, resulting in a volatile gold market.
Gold definitely does experience significant volatility from time to time’ says David Jones ‘ In the last six months there have been a couple of days where the price moved by more than 5 percent. It should be viewed in the same way as other assets, be they shares, bonds or currencies; it is a fact of life that market volatility has increased over time and investors shouldn’t think it is immune from big swings in either direction.
However, as a government print more paper money, investors are rushing to buy gold as a safe haven metal to hedge against a weaker US dollar and possible rising inflation.
‘I think this has definitely been the case over the last 12 months’ says Mr Jones, ‘ and inflation could well be the deciding factor in the fate of gold this year.
‘The UK inflation figure for March was 3.4 per cent and the latest Bank of England minutes voiced the first concerns over this. Many people feel that inflation is going to draft lower this year, but it is not doing this at the moment. Although I think it is currently being ignored, inflation has the capacity to surprise markets as the year goes on and this could end up being the catalyst for further gold strength as investors return to it the traditional hedge.
Peter Archer - The Times.