AFTER reaching a peak of $1,922 per troy ounce in September 2011, gold has struggled to break new ground, with every rally since then failing to match the previous. Indeed, after the price performances of 2003 to 2011, the last 18 months have been constrained. And for quite a few reasons this is surprising.
One of gold’s main attractions has always been that it has a fundamental valuation and that, no matter what, there is a generally finite amount of it (rather like the argument over land prices in the UK). The same cannot be said for paper currencies, whose availability tends to increase in line with whatever the government of the day (and/or central bank) feels it can get away with. Over the last two years, central banks across the globe have been printing money as if it was going out of fashion (quantitative easing to give it its euphemistic nomenclature). You would think that this would have had a correspondingly positive effect on precious metal prices. While the money supply in the UK has been negative recently (for all the easing), the same cannot be said for the US, where the rate of increase has gone up.
Added to this, for the vast majority of investors gold is a zero yield asset – in that it gives no dividend or interest rate return. When interest rates are high, this makes holding gold an expensive proposition. But when they are low, the attraction becomes more obvious. With most interest-bearing returns standing around 0.5 per cent, the loss on holding the yellow metal is minimal. Again, you would expect that the fall to virtually zero rates since 2009-10, and the knowledge that this will probably last for years to come, would have had a positive price effect.
And finally, dramatic times generally cause investors to look to safety. The gyrations of the European Union, on-going concern over the fiscal cliff in the US, general worries about growth, the fear that “fiscal printing” will lead to inflation (the classic gold bugs’ palliative), and the reputedly vast future capital requirements needed to keep economic momentum going, would all normally be considered to be gold-constructive.
Not only this, but it is very rare that I ever see anything other than analysts telling me that $2,000 is the next target on the way to $2,500. And our own clients (who probably reflect the retail position the world over) have been buying on any weakness.
So why are we stuck in the mid $1,600s, rather than somewhere nearer to $1,800 or $1,900 (or higher)? The fear for the bulls is that we now know all the good reasons for buying and they do not seem (at the moment) to be enough. The major exchange-traded funds, the hedge funds and even retail clients are all sitting on large long positions. Who is left to buy?
No doubt there will be crises along the way, which will have their own particular effect on the precious metals price. And the fact is that the total liquidity in the market is not actually that great, and the product (unlike oil or wheat) is not consumable, so big buyers can have an impact beyond that of other commodity markets.
The forecast for the surge higher is still there. But the wait for the rally seems to be getting eternal.
Simon Denham is chief executive of Capital Spreads. You can follow him on Twitter @DenhamSimon
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