Has gold lost its lustre?
Gold has had a difficult year so far – but has it really lost its lustre? “The growth in gold has largely been driven by a flood to safety and a hedge against inflation,” says Mike Tonkin, market commentator at Saxo Capital Markets SA “But gold has lost
Essentially, QE Infinity is the US Federal Reserve’s third round of quantitative easing, but it’s being called ‘QE Infinity’ because there seems to be no clearly defined end to it.
Tonkin says this has also coincided with a significant drop in the measure of the VIX index, more commonly known as the ‘fear index’ or ‘fear gauge’.
“Gold is a ‘fear asset’ but the greatest fear – US downgrade – saw gold trading at an all-time high,” says trader Simon Brown of JustOneLap. “The world survived that, so what else is there to fear? Local gold investors have been hurting but the weaker Rand has cushioned the blow somewhat.”
Commodity or share?
Investors who want exposure to the metal are wondering if it makes more sense to buy the commodity or the share.
“Local JSE shares have been affected by the cost of mining the metal. This has been highlighted by Gold Fields splitting its South African assets from other regions as well as some offshore shares (Randgold Resources in London) having outperformed the commodity,” says Tonkin.
He says that the USD traded commodity also gives South African clients a better relationship to fluctuations in the ZAR than being in a local share.
“Understanding the currency effect on your investment is vitally important for any investor. As an example, buying gold in Japanese Yen gives an investor access to an investor’s hedge against inflation, a hedge against an upset in global markets and exposure to the possible intention of the Japanese government to devalue their currency further,” he explains.
What lies ahead for gold?
What lies ahead for the metal? “It’s an interesting dynamic. As many stock markets make new highs, further quantitative easing takes place and a global currency war could become a reality,” says Tonkin. “It would be hard to disparage a prudent investment with exposure to the glitter of gold. Make sure you do your homework into the share as the commodity might be the better angle.”
“If you’ve been holding gold stocks, you’ll probably have been in a lot of pain,” says Brown. “A gold ETF, not so much.”
Tonkin says that if you do invest via an ETF you should ensure that it is backed by a sound financial institution.
Mike Brown, managing director of etfSA, says short-term investors have disinvested in gold bullion, both in the futures and ETF markets. “The issuers of such gold-backed ETFs sold the gold bullion they had in stock and reduced the number of gold ETFs in issue relative to the extent of disinvestment,” he explains.
In fact, ETFs dumped 106 tonnes of bullion in February, the largest monthly outflow on record according to Bloomberg data; since the start of January, gold ETF holdings have fallen 140 tonnes.
But Brown is not unduly concerned because he says the sentiment of long-term gold investors hasn’t changed. “The great majority of investors in gold are long-term investors who hold gold as a hedge or insurance part of their portfolios,” he says.
For South African investors, the impact of the Rand/Dollar exchange rate needs to be taken into account as gold investments in South Africa typically trade in Rands. “The Rand depreciation has helped support investment in gold bullion,” says Brown. He therefore concludes that local gold investors have not suffered negative performance from the pullback in the US Dollar gold price.
Editor’s thoughts:
Since gold mine shares are extremely volatile and tend not to pay high dividends these days, and gold coins are expensive to hold and trade, investors tend to think long and hard about their gold exposure. However, the original reason to invest in it – as a hedge – still seems the most sensible and you can’t go far wrong with exposure to gold via an index tracker. Interestingly, gold rose above $1600 an ounce the first time in two weeks on the back of the news about potential savings confiscations in Cyprus. This new uncertainty in the Eurozone could drive investors back into the arms of gold once again … and savers in the EU would do well to put some of their life savings into gold. Are investment managers bullish on gold? Comment below or email [email protected].
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