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.
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GoldCore was interviewed on Bloomberg Television this
morning.
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.