In the short term, a stronger US dollar, fragile sentiment and worries over European central bank gold sales will create a challenging environment for gold prices. In addition, the concentrated and violent sell-off in the second week of April will shake confidence in gold prices for some time, but does not damage the long-term fundamental drivers or gold’s long-term strategic value. We believe that despite the current turbulence, the fundamentals of the gold market remain well in place. Physical demand for gold remains strong in India and China. Between them, they account for over half of the annual global demand for gold. Further, irrespective of potential gold sales in Cyprus, central banks, particularly in emerging markets, have been net buyers of gold for several years and the conditions and objectives driving these purchases remain in place.
In addition, the continuing economic malaise in the OECD, high levels of accumulated indebtedness, the ramp up of quantitative easing (QE) in Japan, and the continued effects of the European sovereign debt crisis serve to remind investors that this economic and credit cycle is different: the solutions will be protracted and the background level of investment risk is higher than in the past. In our view, despite the recent and widely followed pullback in its price, gold has never been more relevant as an investment asset and currency.
In this edition of Gold Investor, we examine the benefits of holding gold in an environment where expansionary monetary policies and the resultant global imbalances in capital accumulation and borrowing, imply significant levels of currency debasement and more frequent tail-risk events.
We also explore what a rotation back into equities, in light of improved investor sentiment surrounding economic recovery in the US, might mean for gold. While there has been some debate about whether a shift from safe to riskier assets could be negative for gold, its diversification credentials increase portfolio efficiency in both good and bad economic times. In addition, we debate why higher portfolio risk – consistent with a rotation out of cash or bonds into equities – actually warrants a higher strategic gold allocation.
I hope you find this edition of Gold Investor informative and stimulating and would welcome your views on the papers contained within.