Wednesday, October 13, 2010

'Gold is the best asset class to be in'

I generally agree with this article, with the exception of the last sentence, although as usual, the mainstream investment analysts have the price targets all wrong. They will be proven to be conservative--again, in my humble opinion.

Regarding the last sentence in the article, there are absolutely counterparty risks with owning gold and silver ETF's, specifically GLD and SLV. Read the documents before investing.
The trouble with chasing performance is that you often join the party too late. Yet gold continues to defy the odds and if the great and the good of the investment world are to be believed, the gold price has further to go.

Last week, the analyst rated the most accurate forecaster of the gold price said the precious metal would keep rising.

"You can't mine gold," say nervous investors who fear that the massive printing of money by central banks under the guise of quantitative easing can only lead to runaway inflation. Sceptics of gold as an investment point to the costs of owning it and the fact that it produces no income.

Finding an analyst who is bearish on gold is a tough task; most appear to believe that gold is a worthy asset, not least because of the continued economic uncertainty. But four years ago The Sunday Telegraph found one. Nick Goodwin, a much quoted South African mining analyst, warned people against jumping on the bandwagon when the price stood at $600 an ounce.

He said: "I have been following gold for 30 years and gold is a bitch. Why weren't people buying gold when it was $250 but want to buy it at $600? Gold has had a hell of run and it needs to take a breather." Mr Goodwin was proved mightily wrong and today the rationale for investing on gold stands firm.

Mr Hitzfeld said further increases in the price were "preprogrammed". He said factors exerting upward pressure were renewed fears among investors sparked by recent loosening of monetary policy by the US Federal Reserve and reforms in the Chinese market that gave investors there greater access to the metal.

"The Chinese government has encouraged consumers to invest in gold, and with great success. Chinese demand will now increasingly be felt on the global markets," Mr Hitzfeld said.

Although China is now the world's largest gold producer, this production would be insufficient to meet domestic demand, so China would increasingly import gold, draining supply from the rest of the world and putting upward pressure on the price.

The Chinese government's gold reserves have also risen sharply and there is scope for further increases, as they account for just 1.7pc of foreign exchange reserves, Mr Hitzfeld said.

Analysts from ANZ, the Australia and New Zealand banking group, agreed. Describing gold as "the best asset class to be in", the analysts, Mark Pervan, Natalie Robertson and Andrew McManus, said: "Gold has been the strongest performing and least volatile major commodity and financial asset class in the past 10 years – we expect this trend to continue.

"We see more upside for gold prices as the key drivers of a safe-haven and currency-hedge demand are joined by the emergence of strong demand from China and India.

The issue for investors who have yet to invest in gold is whether it is too late. Mr Soros may be a gold bull at the moment, but he still has his reservations. He said in January: "When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold."

I left out analyst price targets by design, as they are meaningless. I also left out the vehicles on how to own gold--I highly recommend reading the whole article. The article doesn't mention gold- and silver-related assets like mining shares.

And this is the last sentence I disagree with. Under normal market conditions, ETF's are good for tracking physical spot prices. But when markets aren't properly functioning in an orderly manner (which is one of the primary reasons for possessing physical bullion in the first place), the paper contracts of futures markets and ETF's could decouple from the spot price if there is a run on physical inventory. In other words, there are multiple claims on the same ounce of gold as they are not 100% backed by inventory.

Alternatively, follow Mr Soros and invest via an ETF – "physically backed" ones that own actual gold should be the safest.

See disclaimers in the side bar.

Disclosure: long gold and silver, long gold and silver mining shares.

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