Gold has had a disappointing run this year. After finishing 2012 at USD $1664, prices plunged in both April and June, closing out the financial year at USD $1192, down 28% in USD terms in only six months.
Despite this recent weakness, a look at gold over a longer period highlights how strong it has been, outperforming many of the traditional assets where trustees tend to concentrate their portfolios, in some cases by a considerable margin.
[1]And while the current correction has made many investors understandably nervous, a sober assessment of the economic landscape highlights that all the fundamentals underpinning the gold bull market are still in place.
Therefore, while further short-term weakness can’t be ruled out (especially with investor sentiment so negative), much like the previous corrections we’ve seen this decade, this current bout of weakness is likely to prove a fantastic buying opportunity for those who have a longer time frame in mind.
The outlook for precious metals
Despite the hope and optimism that a year of rising equity markets generates, the reality is that the global economy is not recovering from the GFC.
The GFC was the end result of a multi-decade explosion in debt across the developed world, made possible by 30 years of falling interest rates, which engulfed all sectors of society (individuals, businesses and government).
Despite the chaos this caused only a few years ago, to date, governments and central banks have attempted to cure the problem with even more debt.
Despite these steps, there remains a clear downtrend in economic activity across the globe, especially in the developed world.
Even Australian jobs numbers released Thursday showed clear deterioration, not surprising as we struggle to decouple from our dependence on the mining boom.
A continued deterioration in the economy, and this environment of elevated risk, will ultimately support gold prices going forward, as investors grow nervous about the outlook for, and historically low yields on offer, in traditional investments like equities, cash, property and bonds.
And the potential is considerable when one considers the current breakdown of the world’s financial asset pool.
[2]If even a trickle of funds rotates away from fixed income, equities or money markets toward gold, we believe prices will skyrocket.
On top of continued economic weakness, negative real interest rates, significant risk and low yields in traditional assets, the other major factor which will prove bullish for precious metals going forward is the incredible physical demand from emerging markets. The central banks of Brazil, Russia, India and China, among others (who to date own proportionally very little gold) are busy diversifying their reserves away from US and European government bonds into physical gold.
This is a process likely to continue for many years, requiring the purchase of thousands of tonnes, and it is being complimented by unprecedented retail demand, particularly in China, where imports of gold regularly run at over 100 tonnes a month. Given gold’s scarcity, and more importantly, the stability of its overall supply (the key differentiator between it and other commodities), this demand can only lead to much higher prices.
A gold boom?
A significant rally from here in the gold price would not be without precedent. In the last great gold bull market of the 1970s’, where gold rose from $35 to $850, there was a roughly 18 month period where prices corrected by 45%, as the chart below shows.
[3]Rather than spelling the end of the bull-market, that mid 1970s’ correction, which looks very similar to the one we’re currently experiencing, proved an incredible buying opportunity, with prices skyrocketing over 700% from that point on.
Considering gold is still severely undervalued by historical standards (relative to inflation, its relationship with equities, or versus a perpetually expanding global money supply), and the fact that the fundamentals underpinning the current bull market are stronger than those that saw such a stunning move back in the late 1970s, similar returns should not be ruled out in the years ahead.
It could be even better news for trustees’ as a potential fall in the AUD would add to their upside potential, as well as providing some much needed currency diversification.
With no easy way out from the uncertain times we’re in, the investment potential, and portfolio insurance that physical gold offers is likely to prove increasingly attractive to prudent investors in the years ahead.
Jordan Eliseo has nearly two decades experience in asset management and economic analysis, and has been heavily involved in the precious metal industry since 2004. He currently works as chief economist of ABC Bullion, an independent bullion dealer.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- James Dunn: Macquarie – how the mighty have fallen [4]
- Peter Switzer: Waiting on China [5]
- Paul Rickard: No sizzle in Westpac offer [6]
- Rudi Filapek-Vandyck: Computershare and Lend Lease upgraded [7]
- Penny Pryor: Sydney reaches an 80% clearance rate [8]
- Tony Negline: Where are we at? [9]