July 4, 2013 11:25 am

For the love of gold

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Price falls met with equanimity by gold bulls
Lucy.Warwick-Ching

Gold has been heading south. Fast. If equities had lost 25 per cent since the start of the year, investors would be offloading their holdings in droves. But apart from some evidence of the selling of exchange traded commodities, gold price falls so far seem to have been met with equanimity by most gold bulls. They still believe.

Brian Dennehy of fundexpert.co.uk pointed out to me this week that as the gold price fell in April, denial set in. Some who arguably should have known better were quick to raise the familiar cry of “conspiracy”. And we were soon regaled with photos of investors – mainly in Asia – queueing around the block to buy “cheap” gold coins, and told “this is a buy signal”.

This is, as usual, supported by the enthusiastic comments of gold bulls such as the Aden Sisters, whose website modestly describes their newsletter as “one of the most influential and successful investment publications in the world today”, and who have been forecasting a rise in the price of gold to $10,000. It’s been a long wait: they have been proclaiming this for over 30 years. But as gold bulls they are not alone. Egon von Greyerz, the founder of Matterhorn Asset Management, has continued to predict that bullion could hit $5,000 this year.

The trouble is that with a non-productive asset, such as gold, where the normal assessments around earnings or yields don’t apply, it is difficult to make a fundamental assessment of value. Gold has fairly limited utility beyond jewellery, a conductor of electricity, or a replacement for rotten teeth.

Jason Hollands at Bestinvest sets out why he thinks the auspices now look less favourable for gold: “First, the classic argument for holding gold is that it has an intrinsic worth and provides a store of value when inflation is rampant and paper currencies are being debased. Well, we’re emerging from a near meltdown of the financial system and unprecedented levels of money printing but in recent weeks the markets have recalibrated towards thinking about if and when the US Federal Reserve will reduce quantitative easing. To be clear, this doesn’t mean an end to QE, as the door is left ajar for the Fed to increase bond buying if the US economy falters, but it has served as a warning shot that markets shouldn’t assume QE will be around forever. If markets believe money printing will slow and a process of ‘normalisation’ is on the horizon, that reduces the argument for holding a physical store of value. Meanwhile, inflation has remained relatively unproblematic.

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“Secondly, the shake-out from the Fed’s guidance on QE has seen a spike in bond yields and there may be more to come. As yields have started to widen dramatically, this makes the opportunity cost of holding a non-income generating asset look more expensive.

“Thirdly there is a well-observed inverse correlation between the US dollar and gold prices, and we expect dollar strengthening to continue. This is because gold is priced in dollars, which means a strong dollar makes it less affordable to the rest of the world, reducing demand. Historically, the largest market for physical gold is India, where farmers buy it during the wedding season. The Indian government has been progressively hiking import taxes on gold.”

Many investors have interpreted the stellar rise of gold over the past decade to mean the precious metal is a secure haven for their money. However, when you look at the picture over many years, this clearly isn’t necessarily the case for the long run: gold has actually seen some very prolonged losing streaks.

The message is clear for investors: don’t assume that the sharp losses seen since the start of the year mean that things can’t get any worse from here on.

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