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30-01-2011, 12:01 AM
Business Times - 29 Jan 2011
Is gold starting to lose its shine?
A stabilising global economy coupled with a recovery in risk appetite appear to have put gold in the shade - this year alone it has fallen some 7 per cent.
By Genevieve Cua
THE world's largest gold exchange traded fund - the SPDR Gold Trust, which is also listed in Singapore - recently suffered its largest single-day redemption, raising questions about whether the metal has seen its best days.
Over the last decade, investing in gold has seemed to be a sure thing - it has risen every year since 2001, making for an annualised gain of 17.8 per cent, based on the trajectory of gold spot prices.
But a stabilising global economy coupled with a recovery in risk appetite appear to have recently put gold in the shade. This year alone gold has fallen some 7 per cent from US$1,419 an ounce at the start of the year to about US$1,314. Last July, gold hit a peak of US$1,426.
There is at the moment no shortage of gold bulls. The London Bullion Market Association has compiled its survey of forecasters, reflecting an expectation of continued appreciation. The average forecast is US$1,457, running the range of as much as US$1,850 on the high end and US$1,370 on the low end.
Of late, however, some are sounding a note of caution. Barclays Wealth chief investment officer Aaron Gurwitz may be fairly unusual in being an outright bear on gold.
'We think gold is a bubble,' he says. 'The reason we think it is a bubble is that given the fundamental supply and demand for jewellery and modest industrial use, we think the equilibrium price is between US$700 and US$900 an ounce. The price has gotten much higher because of fear and a fundamental misunderstanding of how monetary policy works.
'People say the central bank is printing money. First, they're not printing money. Second, the central bank creates reserves which they can easily uncreate by buying back the securities they sold, and reducing the balance sheet. And gold has not been a particularly good inflation hedge over time.'
The firm last year recommended that investors with a speculative bent buy a 2012 put option on gold, a position that Mr Gurwitz readily admits has been loss-making. 'We've had that trade on for a while; it has been terrible. The reason we recommend puts is that if something is a bubble, it can keep getting bigger. We wanted to bet against gold but in a way that limited our loss if we were wrong. We lost pretty much 100 per cent of the put price on a mark-to-market basis. But it's a 2012 put, so we have some time.'
Barclays Capital itself says in its latest commodities commentary that physical buying in precious metals exchange traded products has fallen sharply this year and 'even the weak dollar has not prevented prices from falling back'.
'However, we do see potential upside for gold later in Q1 and are holding our recommended position.' It expects gold to hit US$1,495 this year, and to soften to US$1,300 in 2012. Its long-term forecast is US$850.
OCBC yesterday pointed out in a research commentary on gold that while improved risk appetite has dampened gold, there could be an uplift from China, where inflation and monetary tightening measures could cause uncertainty and market volatility.
This year is the year of equities, adds OCBC, for three reasons: an improved economic outlook, companies are in good shape after major cost-cutting, and interest rates remain low.
'The increased cash will make the investment in equity very compelling. As such, gold as a safe haven position may erode as investors demand more equities,' it says.
Still, it adds that gold spot price is likely to be supported as a continuing hedge against a weak US dollar and higher expected inflation. There is also 'a hint of pessimism' due to Europe's structural issues, and the risk to Asia posed by China's monetary tightening.
'Should the economic optimism reverse due to a relapse of the crisis, do expect gold prices to surge upwards, possibly to US$1,600 per ounce at end-2011. For now, we expect gold to continue to (be within) a range of US$1,300 to US$1,400 per ounce to 2H10, before starting a decline to US$1,300 at end- 2011,' it says.
Fear may actually be a greater driver of gold's price than gold's supposed value as an inflation hedge. Inflationdata.com points out that gold actually has a spotty record as a short-term inflation hedge.
It says that while the inflation rate had declined in the 1980s, cumulative inflation actually rose steadily. Gold, however, plunged from its US$850 peak at that time to US$300 in 2001. In inflation-adjusted dollars, the 1980 peak price was US$2,250, and it fell to US$370, losing 84 per cent of its value.
On the flip side, the World Gold Council last year published a paper seeking to put gold's 10-year bull market in perspective. It argues that statistically, gold has not experienced a '2-sigma event' since the 1980s. A 2-sigma event is a mathematical symbol for standard deviation, and is seen as evidence of a bubble as the returns are a deviation from the normal tendency of an asset.
Gold, it said, did see 2-sigma returns in the 1980s. 'This period of rapid gold price appreciation was a bubble and reflective of a number of extreme geopolitical and economic events.'
But there has been no 2-sigma returns pattern since then, unlike other asset prices, 'reflecting that gold's annual returns appear to be in line with normal likely returns'.
It also finds that gold's appreciation - relative to global equity markets and tangible assets such as oil and silver - remains consistent with long-run average levels.
Is gold starting to lose its shine?
A stabilising global economy coupled with a recovery in risk appetite appear to have put gold in the shade - this year alone it has fallen some 7 per cent.
By Genevieve Cua
THE world's largest gold exchange traded fund - the SPDR Gold Trust, which is also listed in Singapore - recently suffered its largest single-day redemption, raising questions about whether the metal has seen its best days.
Over the last decade, investing in gold has seemed to be a sure thing - it has risen every year since 2001, making for an annualised gain of 17.8 per cent, based on the trajectory of gold spot prices.
But a stabilising global economy coupled with a recovery in risk appetite appear to have recently put gold in the shade. This year alone gold has fallen some 7 per cent from US$1,419 an ounce at the start of the year to about US$1,314. Last July, gold hit a peak of US$1,426.
There is at the moment no shortage of gold bulls. The London Bullion Market Association has compiled its survey of forecasters, reflecting an expectation of continued appreciation. The average forecast is US$1,457, running the range of as much as US$1,850 on the high end and US$1,370 on the low end.
Of late, however, some are sounding a note of caution. Barclays Wealth chief investment officer Aaron Gurwitz may be fairly unusual in being an outright bear on gold.
'We think gold is a bubble,' he says. 'The reason we think it is a bubble is that given the fundamental supply and demand for jewellery and modest industrial use, we think the equilibrium price is between US$700 and US$900 an ounce. The price has gotten much higher because of fear and a fundamental misunderstanding of how monetary policy works.
'People say the central bank is printing money. First, they're not printing money. Second, the central bank creates reserves which they can easily uncreate by buying back the securities they sold, and reducing the balance sheet. And gold has not been a particularly good inflation hedge over time.'
The firm last year recommended that investors with a speculative bent buy a 2012 put option on gold, a position that Mr Gurwitz readily admits has been loss-making. 'We've had that trade on for a while; it has been terrible. The reason we recommend puts is that if something is a bubble, it can keep getting bigger. We wanted to bet against gold but in a way that limited our loss if we were wrong. We lost pretty much 100 per cent of the put price on a mark-to-market basis. But it's a 2012 put, so we have some time.'
Barclays Capital itself says in its latest commodities commentary that physical buying in precious metals exchange traded products has fallen sharply this year and 'even the weak dollar has not prevented prices from falling back'.
'However, we do see potential upside for gold later in Q1 and are holding our recommended position.' It expects gold to hit US$1,495 this year, and to soften to US$1,300 in 2012. Its long-term forecast is US$850.
OCBC yesterday pointed out in a research commentary on gold that while improved risk appetite has dampened gold, there could be an uplift from China, where inflation and monetary tightening measures could cause uncertainty and market volatility.
This year is the year of equities, adds OCBC, for three reasons: an improved economic outlook, companies are in good shape after major cost-cutting, and interest rates remain low.
'The increased cash will make the investment in equity very compelling. As such, gold as a safe haven position may erode as investors demand more equities,' it says.
Still, it adds that gold spot price is likely to be supported as a continuing hedge against a weak US dollar and higher expected inflation. There is also 'a hint of pessimism' due to Europe's structural issues, and the risk to Asia posed by China's monetary tightening.
'Should the economic optimism reverse due to a relapse of the crisis, do expect gold prices to surge upwards, possibly to US$1,600 per ounce at end-2011. For now, we expect gold to continue to (be within) a range of US$1,300 to US$1,400 per ounce to 2H10, before starting a decline to US$1,300 at end- 2011,' it says.
Fear may actually be a greater driver of gold's price than gold's supposed value as an inflation hedge. Inflationdata.com points out that gold actually has a spotty record as a short-term inflation hedge.
It says that while the inflation rate had declined in the 1980s, cumulative inflation actually rose steadily. Gold, however, plunged from its US$850 peak at that time to US$300 in 2001. In inflation-adjusted dollars, the 1980 peak price was US$2,250, and it fell to US$370, losing 84 per cent of its value.
On the flip side, the World Gold Council last year published a paper seeking to put gold's 10-year bull market in perspective. It argues that statistically, gold has not experienced a '2-sigma event' since the 1980s. A 2-sigma event is a mathematical symbol for standard deviation, and is seen as evidence of a bubble as the returns are a deviation from the normal tendency of an asset.
Gold, it said, did see 2-sigma returns in the 1980s. 'This period of rapid gold price appreciation was a bubble and reflective of a number of extreme geopolitical and economic events.'
But there has been no 2-sigma returns pattern since then, unlike other asset prices, 'reflecting that gold's annual returns appear to be in line with normal likely returns'.
It also finds that gold's appreciation - relative to global equity markets and tangible assets such as oil and silver - remains consistent with long-run average levels.
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