Gold and Precious Metals

The reasons to own gold remain intact

Gold has fallen sharply in the past couple of days, along with all the precious metals.

Having started Friday 12 April trading at $1,563/oz it suddenly fell late on Friday, ending the day at $1,483/oz – down 5%.

Gold Price Chart April 9 to April 15 2013

Gold Price Chart April 9 to April 15 2013
Gold Price Chart April 9 to April 15 2013

That was too late for traders in Asia, who were most likely fast asleep. So they rushed to sell on Monday morning. At one point the price dipped to $1,395/oz – down a further 6%.

It’s always difficult to pinpoint exactly what makes a market crack like this. But a combination of (false?) optimism about the US economy, gossip about a potential wind down of QE in the USA, investment banks writing negative reports about gold, and slightly weaker than expected Chinese GDP figures seem to be the main issues affecting sentiment at the moment.

Gold’s last price peak was on 7 September 2011, closing at $1,894/oz. This followed a fast run up that started in July of that year. At the current price of $1,423 it is down 25% from that peak. So most investment analysts say that gold is now in a “bear market”. The accepted definition of this is when prices fall by 20% or more – not that I’m a great believer in accepted definitions.

So most investment analysts say that gold is now in a “bear market”

This is a great reminder of the need for diversification at all times. However much we may like anything, we should never go “all in” on one single investment. I’ve seen commentators recommending as much as 80% allocations to gold and silver. Anyone’s faith in their favourite investment will be severely tested if they have that much at stake.

When markets fall as sharply and suddenly as this it triggers a lot of automatic selling, especially by leveraged investors. Portfolio managers worry that big falls could cost them their jobs. Automated computer algorithms are programmed to sell as well, compounding the market moves. A lot of people just panic. Small investors see big price falls and dump positions. Emotions take control.

My advice is to stay cool in these situations. You need to remind yourself of the fundamental reasons why you invested originally.

As far as gold itself goes, ask yourself these questions:

  1. Is there still a slow burning economic, financial and social crisis across most of the developed world (USA, Western Europe, Japan)?
  2. Do governments and their citizens have more debt than they can afford to pay back?
  3. Are large global banks still in poor financial condition?
  4. Will central banks keep printing money and devaluing their currencies? (Right now in the US, Japan and UK, but I expect the European Central Bank to get back in the game eventually.)
  5. Do most or all governments understate their price inflation statistics, resulting in false readings of real (inflation-adjusted) economic growth (e.g. the US)?
  6. Is three quarters of global physical gold buying still done by the huge and growing emerging markets, such as India, China and the Middle East?
  7. Are emerging market governments still nervous about the dollar, and moving more and more of their foreign currency reserves into gold?

 

If you answered yes to all or most of those seven questions then you have plenty of good reasons to own gold. And remember, the gold price fell by around half between 1974 and 1976, right in the middle of a longer-term bull market. After it bottomed out it went on to rise eight times by 1980.

In other words, don’t panic. The reasons to own gold remain intact.

Until next time OfWealthers,

Rob Marstrand

robmarstrand@ofwealth.com

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.