WHAT VALUE IS GOLD?

With Gold prices now closing above USD 1300 per ounce, it deserves a closer look, despite the fact that for us mutual fund investors, capturing the rise in value is a formidable challenge.  

And I am keeping the info especially "lite".  Little attempt is being made at substantiating the current prospects for gold, which others can do so much better.  I thought it more important to putting it into perspective for the purpose of portfolio management.

The following is an excerpt from the latest SingCapital Market Update, normally reserved only for SingCapital Advisors. 

Is Gold becoming the driving factor to the much publicised asset bubble, supposedly forming when inflation runs rampant?

 Gold prices move to ever new highs!

It is only HIGH in relation to the USD.  Indeed, gold prices now appear to form a (short term) speculative bubble in relation to the USD. In case you are not sure, - I call it a bubble when market activity in a particular asset increases disproportionately due to speculative, short term trading.

I think that the highest prices we will see in the short term – and until sometime next year is $1318. 

 However, is gold dictating its price or is it a question of uncertain fortunes of the USD?

The perspective of a rally in the gold price is only the CORRECT VIEW for USD investors. Australian Dollar investors, on the other hand, have seen their gold price peak in June this year.  Indeed, gold prices in AUD are down more than -12% since March 2009!

Europeans have a similar perspective. Its gold peaked even earlier – at the time when the USD/EUR ratio was down to $1.19. SGD investors experienced their peak at around the same time, followed by a sharp correction into late July.  Since then, the gold price in SGD has been bouncing back strongly, but remain below the June peak!

These are just a few perspectives from a select range of currencies.  I don’t see how these could possibly give an inclusive picture of where gold prices are heading.

An asset bubble is predicted: experts are pointing fingers at fiscal and political excesses, after the "feeding" of capital markets with trillions of tax payers' money.  "Hyperinflation", or at least above average inflation is to be expected, they say. What we should really be saying is that currencies - and their buying power – are falling.  Gold is a “fixed asset”.  Currencies fluctuate around it – sort of.  In the olden days (of Richard Nixon’s predecessors), when the USD was pegged to the gold price, today’s conundrum would probably not be such an issue. Is an asset bubble coming (- and are currencies losing buying power)?  It all depends on whether the US economy can convincingly recover from the mess they got themselves in over the last 4-5 years.  Why? Because the asset bubble is viewed from a USD perspective only!  I bet my bottom dollar that the Chinese government have other ideas about that.

Here are more quotes relating the story:

Turning the picture on its head: The real value of Gold is not going up.  Currencies are going down

Gold is a fixed asset.  The measure tape applied to ascertain its value keeps changing

"Writings on the wall" 

In January 2010, I presented SingCapital's first annual outlook on capital markets event.  I highlighted the difficulties facing investors in making money with gold this year.  I also made a simplified directional chart, indicating JUNE as the potential peak and turning month of the year and gold prices continuing lower till early December 2010! Note that even as early as January 15, we forecast a peak gold price of $1335!


We should not be in any doubt that the rise of gold prices is here to stay, and while I would put a lid on the current advance by about $1318-1336, in the longer run we must accept that we are nowhere near the $1800 mark, frequently quoted as the "inflation adjusted, realistic price of gold". 

But let the long term perspectives not lull you into believing that gold prices will not see anymore volatility.  Indeed, prices have been rather well behaved of late, suggesting that this peaceful path of relative low volatility may come to an early end when stock market turbulence sets in, in a few weeks at the latest.  

Finally, a quick comparison between funds investing in gold and precious metal company stocks and those that invest in precious metal futures, - seen against the "naked" gold price, from a USD perspective:


Now, you tell me when I really should have invested in gold! If you were sharp in January or March, you could have made about 20% by investing in the gold company stocks fund (RED LINE). The precious metal futures fund peaked as early as April but had lost it again by the time gold prices peaked in June!  Both funds suffered losses after June and REALLY only after all the technical signals shouted SELL (middle of July) did both the stocks and the commodity funds rally nicely. I have said beginning of the year that TRYING TO CATCH THE GAIN produced by a rallying gold price with the tools at our disposal is going to leave you a nervous wreck this year. 


One needs to adjust one's strategy in accordance with what is an achievable opportunity, keeping a clear focus on an advantageous risk-reward ratio. Stay clear of excitable exotics, the ones everyone tells you to invest in!