Gold's unexciting performance in the past six months leaves all but the most optimistic investors wondering if it has finally reached the end of its 12-year upturn.
Even if gold does not drop precipitately but continues moving sideways for a while, there's an opportunity cost for investors in holding a nonperforming asset at a time when other assets are appreciating. Portfolio diversification becomes even more important.
Gold came close to US$1900/oz in late 2011 but ever since has traded largely within a $1550/oz-$1750/oz range. On February 20 the charts showed a "death cross", which means the downward-sloping 50-day moving average crossed the downward-sloping 200-day average. It's a technical signal that the price could fall sharply.
But Martin Murenbeeld of DundeeWealth Economics, who is well known in investment circles for his detailed and often accurate predictions of gold price trends, told the Prospectors & Developers Association of Canada conference in Toronto earlier this month that the death cross is not a reliable indicator of an approaching bear market. There have been six death crosses since the bull market began in 2001. He believes the long-term upcycle will continue, but that gold is in a correction phase.
Murenbeeld listed a number of positive and negative factors for gold this year. Factors likely to push the price higher include the continuing debt crisis and central bank buying. Murenbeeld says gold is not expensive on a historical comparison, and it should benefit since global imbalances will devalue the dollar. Negative influences include rising real interest rates on the back of an ending to quantitative easing, general trends towards deflation and investors switching from gold to equities.
Murenbeeld's revised forecast is for gold to average $1665/oz this year, from his previous forecast of $1768/oz. His average prediction for next year is $1720/oz.
Gold analyst Robert Jillies of London traders Sharps Pixley, who are usually bullish, insists the fundamentals are still in place to support a continued bull run, though he admits gold's -5,7% return so far this year compares poorly to the +10,5% from the Dow Jones index.
Jillies says supportive factors include that the market is oversold and should show some short covering in the immediate future, that gold recovered some ground from its recent drop on central bank buying and robust Asian demand, and that the fragility of economic recovery is still a major concern.
"We cannot help but add a fourth (point) in this particular commentary," Jillies says. "When Goldman Sachs and other major banks are shouting to abandon ship, investors should exercise caution."
He was referring to a Goldman Sachs report three weeks ago in which the investment bank cut its gold price forecast for this year to $1600/oz from $1810/oz previously. Goldman Sachs said heavy gold selling is coinciding with a gradual increase in US real rates on the back of improved economic growth prospects.
Matt Brenzel, a portfolio manager at Cadiz Asset Management, says it is difficult to predict gold's direction, but if real interest rates pick up there would be no reason for a sustained increase in the gold price.
Last year gold fell after it appeared there had been an agreement on Europe's overindebted nations and the US resolved to continue its quantitative easing programme. Also negative for gold has been the fact that inflation shows no sign of rising, Brenzel says.
Gold production in 2012 was about 2800t and scrap gold supply about 1700t, giving total supply of around 4500t. Jewellery demand was about 2000t and central banks bought 300t-400t, while total investment, including exchange traded funds (ETFs), was about 1500t. Since 2008, ETF holdings have been increasing in size every year.
This year gold was driven down by substantial selling of ETFs. Global holdings of the funds fell 140t in January, though there is still buying in India, and the SPDR, the world's biggest gold ETF in terms of physical gold in trust, is now holding its lowest volumes since October 2011. It trades in New York, Singapore, Tokyo and Hong Kong.
Though global central bank buying has been increasing, it remains relatively small in relation to the total market size.
Financial Mail
