In the last few months, we have been reading predictions and forecasts from bullion analysts who insisted and argued that gold price is booming to touch $2,000, $3,000, $5,000, $10,000 per ounce in the coming years.
These forecasts have caught people’s attention who have been pouring money into gold and other precious metals all these months. But after the big surge of gold price to $1,227 per ounce some two months back, the yellow metal has been climbing down the ladder of speculation.
Despite speculators going on the ‘boom-in-gold-price predictions’, the yellow metal price has been sinking in the last two months. “If the gold price fall continues like this way, it is certain to touch down to $1,000 per ounce or below this level in the next one month,” says bullion analyst Mark Robinson.
Robinson, who is not a great bull on gold, says even if gold price falls to $900 or $800 per ounce, people should not complain. “For those who have invested in gold some years back, even $900 or $800 per ounce is a great price tag. So, there is no room for complaints even if gold price falls to realistic levels,” he said.
Robinson, a keen bullion watcher focusing on China, says that the Chinese government wants gold price to plunge to $800 per ounce level. “China’s biggest ambition these days is to build up gold reserves. For this, the best thing that China wants is a big fall in gold price so that it can buy more gold from IMF, gold miners and from the physical bullion market,” argues Robinson.
It is not just Robinson who is a bear in gold price forecast. On Monday, a senior analyst with Citigroup came out with purely bearish prediction on gold. Citigroup bullion analyst Alan Heap said that gold prices could sink to $820 an ounce by 2014.
Here is that interesting article that TheStreet.com published on the bearish prediction on gold:
“NEW YORK (TheStreet) — gold prices could sink to $820 an ounce by 2014, in the absence of inflation or strong demand from China, says a Citigroup analyst
Alan Heap, an analyst at Citi Investment Research, adds a bearish voice to a crowded debate over where the precious metal is headed. Billionaire investor James Rogers and perma-bear David Tice say gold will hit $2,500. James Turk , Author of GoldMoney, predicts $8,000, while author Mike Maloney is betting on $15,000.
Over the last decade, gold prices have soared from $250 an ounce to an all-time high of $1,227 an ounce, with many analysts believing that gold is in a continued bull market despite short-term pullbacks. Heap broke with this bull view by saying in a research analysis, “Gold: Paper Problems,” that prices will sink to $820 by June of 2014 and head lower long term to $700 an ounce.
As global economies print more money and lower interest rates to survive financial crises, gold becomes popular to own. As paper money loses value, investors turn to gold as an alternative safe haven asset.
As gold prices hit a record high of $1,227 an ounce, the U.S. dollar started to move towards its all-time low of $71.40. As the dollar loses value, commodities become cheaper to buy in other currencies. Many analysts expect low interest rates, President Obama’s $3.8 trillion budget plan, a raised deficit ceiling and money printing pressure the dollar and buoy gold prices.
Over the last 10 years, investors have been diversifying into gold more than any other asset class. You no longer have to be a doom and gloom analyst or store gold bars in a bank in order to own the precious metal. Average institutional investors and world central banks have been increasing their gold holdings supporting high prices. Helping investors buy gold is the emergence of gold ETFs. There are now three physically backed ETFs available SPDR Gold Shares(GLD Quote), iShares Comex Gold(IAU Quote) and ETFS Gold Trust(SGOL Quote).
Central banks have become one of the biggest buyers of gold. Countries increase their gold reserves on a percentage basis, usually irrespective of the spot price. In the past year, countries like China, India and Russia have transitioned from being net sellers of gold to net buyers. Portugal holds 90% of its reserves in gold, while the U.S. has 70%. China currently only holds 1,054 tons of its reserves in gold, which is less than 2%.
The biggest threat to rising gold prices is a substantial decrease in long positions in paper markets, Heap writes in his report. “Positions held by money managers and broader non-commercial positions have fallen since November 2009 when the USD strengthened. Non-commercial net long positions are at 5x the average levels seen over the last 17 years.”
The Euro reached a seven-month low against the U.S. dollar Friday, as sovereign debt fears in Spain, Portugal and Greece continued to devalue the currency. The dollar is playing the role of safe haven asset for investors jolted by global economic recovery fears lead them out of riskier commodities. There is also an expectation that the Federal Reserve might raise its key interest rate target sooner than expected, which would also support the currency.
The most popular physically backed ETF SPDR Gold Shares(GLD Quote) has seen a decline in tonnage since the beginning of 2010 from 1,128.74 to 1,104.54. Heap noted that ETF holdings are high, but stable. As long as worries over a global banking crisis subside, holdings should remain flat.
A big driver for gold prices in 2009 was pent up demand from China. The country has recently increased its gold reserves to 1,054 tons from 600 tons and is expected to continue diversifying. However, recently the Chinese government ordered banks to increase their reserve ratio by 50 basis points and has encouraged them to restrict lending. China is targeting an 8% growth rate for 2010 instead of the 11% analysts had anticipated.
China’s emerging middle class has also unleashed significant gold buying in the physical market. According to the Citi report, from September 2008 to September 2009, China retail demand grew 20 tons out of 260 tons globally. There are worries that the country’s $585 billion stimulus program is slowing down, which would curb gold demand from retail investors as well as central banks Gold is typically seen as a hedge against inflation as investors buy the precious metal as an alternative asset. But Heap argues that it’s not actual inflation that correlates to gold prices, but inflationary expectations. According to the figure above in 2009, the U.S. Consumer Price Index dipped into negative territory, which means no inflation at all. However, gold prices kept rising. Heap thinks that inflationary expectations would have to skyrocket to boost gold; just a pick-up in inflation wouldn’t be the big mover in prices many analysts anticipate.”
Wednesday, February 10, 2010
“Five Reasons to Avoid the Gold Rush”
The reasons why one should sell the cat, pawn the mother-in-law, and use the proceeds to buy gold are well known: the Fed is printing money faster than you can read this, which will result in inflation; the government is borrowing like a drunken monkey, so the dollar will be devalued; this will debase all currencies, so the only thing that will save you is the shiny metal.
However, here are some arguments why one should think twice before jumping in bed with gold bugs, or at least remain sober while determining gold’s weight in the portfolio .
1. For investors (not speculators) it is very hard to own gold, because you cannot attach a logical value to it. Unlike stocks or bonds, gold has no cash flow and has a negative cost of carry – it costs you money to hold it. It is only worth what people perceive it to be worth right now. The argument I commonly hear is, “What about all those Enrons, Lehmans, Citigroups, etc. that either went bankrupt or got near it? What was the value of those?” If the lesson learned is not to own stocks but to own gold, it is the wrong lesson. The lesson should be: own companies you can analyze (the aforementioned companies were unanalyzable) and diversify – don’t put your all net worth into one stock.
2. The gold ETF SPDR Gold Shares (GLD) is the seventh largest holder of physical gold in the world. If its holders decide to sell (or are forced to sell; think of hedge-fund liquidations), who will they sell it to? This is extremely important, as the presence of GLD changes the dynamics of the gold price, both to the upside and downside. If gold keeps climbing, the ease of buying will drive gold prices higher than in GLD’s absence. In the event of a significant sell-off, there are not enough natural buyers of physical gold. It is a bit like a roach motel – easy to get in, hard to get out.
3. In the past, gold had a monopoly on the inflation and fear trade. Not anymore. Now you have competition from Treasury Inflation-Protected Securities (TIPS), currency ETFs, short US Treasury ETFs, government guaranteed/insured FDIC checking accounts, etc. TIPS suffer from the flaw of the CPI being measured and reported by the US government, which has an inherent bias to understate inflation; returns of commodity ETFs are skewed by price differentials between financial derivatives and spot prices of underlying commodities; returns of leveraged ETFs diverge significantly over the intermediate and long run from the underlying index; FDIC reserves are being depleted with the every-Friday-night bank bailout (but believe you me, the US government will not let FDIC go bankrupt, even if it means it has to raise taxes and impose draconian fees on the banking sector).
The bottom line here is this: none of these investment vehicles are perfect, in fact many have significant flaws; but despite their flaws they attract money away from gold, thus undermining gold’s monopoly on the fear/inflation/currency debasement trade. (I’ve discussed it in greater detail in my book).
4. If, because of points 2 or 3 above, gold fails to perform as expected, the perception of what gold is worth may change dramatically.
5. Over the last 200 years, gold was really not a good investment. It may have a day in the sun, but it may not. And the cost of being wrong is fairly high.
Though gold bugs make it sound as such, gold is not the only and not the best alternative if the worst fears come to pass. The best way to deal with the risks of dollar devaluation and high inflation – with a much lower cost to being wrong – is, instead, to own stocks of companies that have pricing power of their product. When inflation hits, they will be able to raise prices and thus maintain their profitability. Also, companies that generate a large portion of their sales from outside the US will benefit from the declining dollar.
Gold bugs look at gold as a currency, but it is not one and unlikely to be one in our lifetime. Here is why: there is not enough of it around, so even if world government were to adopt a fractional system (currency in circulation as a multiple of gold reserves), they will never go for it, because central banks and governments will never give up their monetary tools – inflation is a very addictive tool to fight growing monetary obligations.
There is a wild card in the price of gold, though: China (John Burbank made that argument at the Value Investor Congress in Pasadena). If it decides to switch partially from owning US Treasuries to owning gold, the price of gold will skyrocket.
Counter to the above
1. 1.) Analysts fail to understand the allure of gold is that it is seen as prudent and not speculative.
2.) A valid point, one should note that the price of gold has gone up $600 since this ETF started trading in 04. However a look at GLD since its inception shows the bulk of volume is a) at a price point above $800 and b) occurs between the March high and now.
3.) The demand for these instruments relative to gold is a function of trust in these days of financial and accounting alchemy.
4.) If an investment fails to perform as expected then yes one will generally cut exposure to it. Gold has performed as expected over the past 200 years so don’t see much risk here.
5.) See point 4.
6.) There seems to be an assumption in this post that every person out there that owns gold or intends to own gold has sold every asset they have in order to do so.
However, here are some arguments why one should think twice before jumping in bed with gold bugs, or at least remain sober while determining gold’s weight in the portfolio .
1. For investors (not speculators) it is very hard to own gold, because you cannot attach a logical value to it. Unlike stocks or bonds, gold has no cash flow and has a negative cost of carry – it costs you money to hold it. It is only worth what people perceive it to be worth right now. The argument I commonly hear is, “What about all those Enrons, Lehmans, Citigroups, etc. that either went bankrupt or got near it? What was the value of those?” If the lesson learned is not to own stocks but to own gold, it is the wrong lesson. The lesson should be: own companies you can analyze (the aforementioned companies were unanalyzable) and diversify – don’t put your all net worth into one stock.
2. The gold ETF SPDR Gold Shares (GLD) is the seventh largest holder of physical gold in the world. If its holders decide to sell (or are forced to sell; think of hedge-fund liquidations), who will they sell it to? This is extremely important, as the presence of GLD changes the dynamics of the gold price, both to the upside and downside. If gold keeps climbing, the ease of buying will drive gold prices higher than in GLD’s absence. In the event of a significant sell-off, there are not enough natural buyers of physical gold. It is a bit like a roach motel – easy to get in, hard to get out.
3. In the past, gold had a monopoly on the inflation and fear trade. Not anymore. Now you have competition from Treasury Inflation-Protected Securities (TIPS), currency ETFs, short US Treasury ETFs, government guaranteed/insured FDIC checking accounts, etc. TIPS suffer from the flaw of the CPI being measured and reported by the US government, which has an inherent bias to understate inflation; returns of commodity ETFs are skewed by price differentials between financial derivatives and spot prices of underlying commodities; returns of leveraged ETFs diverge significantly over the intermediate and long run from the underlying index; FDIC reserves are being depleted with the every-Friday-night bank bailout (but believe you me, the US government will not let FDIC go bankrupt, even if it means it has to raise taxes and impose draconian fees on the banking sector).
The bottom line here is this: none of these investment vehicles are perfect, in fact many have significant flaws; but despite their flaws they attract money away from gold, thus undermining gold’s monopoly on the fear/inflation/currency debasement trade. (I’ve discussed it in greater detail in my book).
4. If, because of points 2 or 3 above, gold fails to perform as expected, the perception of what gold is worth may change dramatically.
5. Over the last 200 years, gold was really not a good investment. It may have a day in the sun, but it may not. And the cost of being wrong is fairly high.
Though gold bugs make it sound as such, gold is not the only and not the best alternative if the worst fears come to pass. The best way to deal with the risks of dollar devaluation and high inflation – with a much lower cost to being wrong – is, instead, to own stocks of companies that have pricing power of their product. When inflation hits, they will be able to raise prices and thus maintain their profitability. Also, companies that generate a large portion of their sales from outside the US will benefit from the declining dollar.
Gold bugs look at gold as a currency, but it is not one and unlikely to be one in our lifetime. Here is why: there is not enough of it around, so even if world government were to adopt a fractional system (currency in circulation as a multiple of gold reserves), they will never go for it, because central banks and governments will never give up their monetary tools – inflation is a very addictive tool to fight growing monetary obligations.
There is a wild card in the price of gold, though: China (John Burbank made that argument at the Value Investor Congress in Pasadena). If it decides to switch partially from owning US Treasuries to owning gold, the price of gold will skyrocket.
Counter to the above
1. 1.) Analysts fail to understand the allure of gold is that it is seen as prudent and not speculative.
2.) A valid point, one should note that the price of gold has gone up $600 since this ETF started trading in 04. However a look at GLD since its inception shows the bulk of volume is a) at a price point above $800 and b) occurs between the March high and now.
3.) The demand for these instruments relative to gold is a function of trust in these days of financial and accounting alchemy.
4.) If an investment fails to perform as expected then yes one will generally cut exposure to it. Gold has performed as expected over the past 200 years so don’t see much risk here.
5.) See point 4.
6.) There seems to be an assumption in this post that every person out there that owns gold or intends to own gold has sold every asset they have in order to do so.
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