It’s a fickle affair investing in gold - Australian Financial Review

JACQUIE HAYES - 16 August 2013
I’ve been spending time on Victorian ski-fields preparing my daughter for her first go at the state’s interschool snow sports competition. I hope to instill in my children my love of Australia’s great outdoors. But seeing our alpine environment in winter has reminded me why I learnt to ski in the United States and why I go back there whenever I can.
Aspen’s still my resort of choice, though Deer Park in neighbouring Utah mightily impressed this year, to the point that our week-long stay over Christmas and New Year’s became a fortnight. The sole irritant was the nearby Park City Museum – although it provided a clever interactive insight into the city’s transformation from a booming silver-mining town to a ski resort, seeing it six times was too much. There was skiing to be done, but my son, aged six, wouldn’t let up. He was hooked on the mining thing.
Since then, we pay attention to precious metals, so the recent dramatic behaviour in gold prices has been of great interest.
In a short time gold has gone from being one of the safest of safe havens to being dumped like a hot rock. Why the change of tune?
Explaining how gold is priced is not easy. Even US Federal Reserve chairman Ben Bernanke has trouble with it, admitting to a Senate banking committee last month that “nobody understands gold prices and I don’t pretend to understand them either”.
Whether that’s really the case is hard to get a fix on; whether it really matters is more relevant for investors.
Still, to get a sense of why the gold price has moved so high over time, one needs to consider it in the context of its history and future prospects.
About 95 per cent of all the gold that’s ever been mined still exists. Half is in cultural and religious artefacts, a quarter is in central banks and most of what’s left is already in wealthy private hands or institutions. Forward mining production in accessible land has only about 20 years left to run, according to some predictions.
Meanwhile, in any given year only about 4 per cent of all gold can be traded, so even subtle shifts in investment attitude towards gold can mean there’s not enough to go around.
This dynamic has contributed to the rise and rise of gold prices in the past dozen years, from $US258 an ounce in 2001 to $US1336 per ounce last week, after reaching its interim peak of $US1920 per ounce almost two years ago.
The recent drop from such heights has turned one-time hot supporters of gold to positively glacial on its short-term investment merits.
US investment house Goldman Sachs has predicted gold prices will slip to as low as $US1050 per ounce by the end of next year as more stable economic conditions return.
Swiss investment banks have followed suit, with UBS turning bearish, while institutional investors surveyed in May by Credit Suisse rated gold as having the worst 12-month outlook among commodities. The bank has warned that gold “is going to get crushed”. But how can that be?
If one considers the fundamentals of gold and the fact that they haven’t changed – industry needs are growing regardless of price, and jewellery continues to demand at least 55 per cent of global production – then surely the future is not that bleak?
I’m talking about physical gold here, not exposure to goldmining companies where the potential for human error (think Newcrest) and other variables can magnify matters.
Physical gold cannot be printed, made or inflated, and is still a liquid, divisible and portable store of wealth that has been deemed precious since civilisation began. We got an inkling that there are plenty of investors who share this view in April when the gold price really tanked. There were all sorts of conspiracy theories doing the rounds after the “take-down”, but the “hot money” from hedge funds is believed to have been largely responsible by ramping up the price before taking quick profits.
Melbourne Mint chief executive Peter August says he and other physical gold dealers were bracing for a flurry of panic selling in the wake of the paper sell-down. “But the opposite occurred, with people queuing up to buy gold wherever they could buy it.”
The Perth Mint was forced to restrict individual sales and extend wait times out to several weeks. The US Mint ran out of gold eagles and the Canadian Mint ran dry as well. “We [Melbourne Mint] literally had queues out the door – all day, every day – for about four or five weeks. It was crazy.”
Investors weren’t lining up for the large gold bars featured in movie scenes of bank heists, though those bars certainly exist. But at 400 ounces (12.44 kilograms), they’re worth about $590,000 and are traded almost exclusively among institutions.
Less unwieldy for regular investors are kilogram bars (32.151 ounces), which are about the size of an iPhone (though, at $47,700, considerably more expensive).
Even though gold is about 36 per cent off its top price, its long-term history shows a fairly compelling investment story, especially when its track record is compared with other asset classes over the past 10 years.
The only difference with the gold story now is that it continues at a time when central banks around the world are printing money at a faster rate than ever. It’s anyone’s guess how all that’s going to work out.
That’s why August suggests portfolio insurance, with a hefty 25 per cent weighting towards gold via dollar-cost-averaging into the commodity, and “buying the dips”.
And if the market naysayers are right and there are more corrections in the next two years, “you should back up the truck!” Then listen carefully as the gold bears change their tunes again.

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