Hang on to gold?
Gold continues to disappoint some investors: given the enormous problems we’ve seen in the financial markets thus far, many investors reason that gold should have really sky-rocketed. It didn’t however. At least not in U.S. dollars.
In other currencies (such as the euro, sterling & Australian dollar) gold is reaching new highs and has again shown an impressive performance last year. In yen and Swiss francs gold’s performance was also a bit lackluster. See here for details. So to go short: gold performed very well in most currencies apart from those which strongly benefited from the reversal of the carry trade (CHF, JPY and USD).
The big question obviously is, will gold continue to perform well going forward? I continue to think it will, if it were only for the following reasons:
1. The global banking system continues to move to the edge of the cliff. A new round of credit write downs, this time in ALT-A, ARMS, consumer loans, credit cards etcetera etcetera is just a matter of time. That is not to mention the derivatives time bomb (1140 Trillion USD?). As long as there’s no trust in the banking system, investors will be piling into the metals.
2. The global economy is in shambles. Lay-offs are around the corner, feeding into more problems for banks. But not only that. A bad economy gets people spending less and saving more. Those savings can go to banks in many case (as the deposits are guaranteed to a max by the government). But what if you own more than the guaranteed amounts? You’ll be looking for alternatives. Bonds were OK havens last year, but at today’s yields you’re really better off in metals.
3. Governments have been bailing out banks and other companies as if there’s no tomorrow. The cost for this generosity will show up one of these day by means of higher bond yields. We already know that several countries are having a harder time to get all their deficits financed. It’s a matter of time before the government bubble will pop. Besides the risk is increasing that central banks will start monetizing the debt. Precious metals are likely to benefit under these circumstances.
4. The central bank printing presses are running over time. Expect inflation, or possibly even hyper-inflation, to result from this. Hedge against this possibility by going long precious metals.
5. Despite all these positive factors for precious metals, the average investor has hardly any (significant) exposure to precious metals in his portfolio. Once the average Joe does, the bull market will be over, but in my view we’re far from that point.
And then of course there are several reasons very specific to the (paper) gold market. That market is manipulated by the central banks, which GATA has been substantiating over the past few years. Interesting new facts in this respect are mentioned by James Turk and Elaine Supkis this weekend. Next to that the the physical inventories of COMEX are a disaster waiting to happen if and when investors start demanding delivery of their futures contracts.
It goes without saying that no bet is one sided though. Jewelery demand is slipping, amongst others in India, and is likely to get hurt further now that the economy is slowing down significantly. The same is probably true for the industrial demand for precious metals. Also, the Western central banks can still dump their gold holdings as if there’s no tomorrow, though I would expect the emerging economies (mainly the BRICs) to be happy buyers if they do.
All in all I see few reasons to get rid of my gold. On the contrary, I’ll be piling into the metals should we see any significant weakness going forward.
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