The big question on everyone’s mind in 2013 with regards to gold is whether the yellow precious metal has reached its zenith and is now coming down. Just in terms of statistics, one year to date gold has dropped approximately more than $60 an ounce. In March 2012 the metal was going through another market retraction from $1,675 per ounce which eventually bottomed out to $1,550 before ramping up to a high of $1,790 per ounce in September. Now, a year later, gold sits at $1,615 an ounce potentially coming back up from another trough (http://www.kitco.com/charts/).
As a result, many investors are starting to decide that gold has made its run for the last 12 years, and it’s time to take funds and put them elsewhere than precious metals. Others argue that gold is not yet done, and the exit door behavior is premature, based on hopes of a rising economy versus actual, concrete evidence of improvement, thereby driving down the value of gold as an investment hedge to the U.S. dollar.
Investors need to remember, and research on their own as well, that there tends to be far more factors affecting the price of gold versus a company stock or mutual fund. Gold tends to be one of the few investments that can be directly affected by government policy around the world, mining production, inflation fears, economic behavior, and perceived valuation of consumers. Few public company stocks, if any, can command such attention and interaction from so many facets of society.
Hands in the Cookie Jar
A number of brokerage houses tend to regularly pin their gold expectations on what the governmental central banks do with gold. In fact, some suggest gold will retract and then rise again in later 2013 because it provides an unconnected safe harbor for banks to bolster their solvency. The European Central Bank for one is expected to continue making big purchases of gold to backup and offset the significant amount of lending the institution has been providing to struggling European Community country members. Known as sovereign debt, these loans are in the hundreds of billions of dollars and pose a significant drawdown on the ECB’s books. To offset these continuing increases in accounts receivable to countries with questionable credit, the ECB is expected to boost demand for gold with its own purchases, thereby pushing up the market price as well.
Central banks are no slouches in the gold market. Annually, they buy up anywhere from 10 to 15 percent of the available new supply of gold posted for sale. And simply examining the central banks’ books per reports will find they are continuing to grow their gold positions as a net result, not decrease them. As a result, these institutions tend to create a market-wide prop for the entire gold market, regardless of what individual investors are buying or selling. Not surprisingly then, the behavior of the central banks with gold is clearly a market indicator to watch.
Few are expecting a rise to $1,800 again this year, but many do expect that purchasing and positioning by institutions and large buyers will continue in 2013, with a potential stabilization of the price level at $1,700 per ounce. Ironically, these retrenchments and subsequent rises suit the market just fine. Instead of riding a roller-coaster of a bubble that then tends to come crashing down quickly, the retrenchment builds floors of support at each drawback, allowing gold to stay higher and higher overall.
Emerging Markets and the Economy
Russians aren’t satisfied with holding in the west or in the U.S. dollar, and they too find gold as a better, unconnected alternative to place their money for growth. This hedging in the eastern country is not unique to gold, either; Russian companies and banks have been gobbling up positions and inventories of palladium and platinum, causing those precious metals to rise in value as well.
Germany is no different. The European country, along with France, has been the core savior of the European community, and often finds itself holding the purse strings that the rest of Europe comes to for financing loans. In a move signaling an interest in alternative positions outside of just currency holdings, Germany has initiated plans to move its gold holdings into the country proper, basing holdings in Frankfurt versus elsewhere in Europe.
At home, the December notes from the Federal Reserve pointed out that gold is still on everyone’s minds and continues to be part of U.S. fiscal policy going into 2013. This particular position has a huge impact on gold price. For example, when some Fed Board members made opinions regarding the continued exposure of monetary policy in gold and other assets, gold prices suddenly fell with investors sensing a sudden government dumping on the horizon. It was a false alarm, but the opinions and related reaction in the gold market was real.
The rise in the U.S. economic market health has also recently contributed to a drawback in gold positions (http://www.resourceinvestor.com/2013/03/08/gold-price-movement-dictated-by-us-economic-tone). People are seeing the Dow and the Nasdaq rise considerably and are considering or drawing money out of gold to place in other investments accordingly. This too contributes to the deflation of demand for gold in early 2013. However, this quick movement can reverse itself just as fast as well. Should the U.S. markets start to falter again with another economic downturn, many can expect to see gold shoot up once more as a safe hedge harbor. However, should the government program cuts be as severe as the media makes them out to be, there should be a ripple effect to the economy within the next year or two, causing a slowdown in business. This is due to the fact that the federal government is the single biggest contractor in the world, spending hundreds of billions of dollars annually on the services and goods of private companies. A number of such players have already scaled back and fired employees as a result of Sequestration, the force budget cuts of 2013.
As long as the federal government has its hands with monetary policy in supporting and subsidizing the U.S. economy, gold will likely stay up through 2013. However, at some point the government has to pull out, even if gradually. Many expect that it will be that divestiture that signals the decline of gold in the next few years with dramatic, if gradual results.
Which Market Tools Make Sense Now?
Exchange-Traded Funds or ETFs are easily available through stock brokerages and provide a similar value position in gold. Two major ETFs provide the majority of paper investments in gold: SPDR Gold Trust (GLD) and iShares Gold Trust (IAU). Both trade on the New York Stock Exchange and are available through most brokerages, including electronic platforms. That said, ETFs continue to raise concerns due to their paper positions versus actual, physical holdings of gold.
For those comfortable with trading paper, similar to a mutual fund in ownership of the asset, versus fussing with physical gold, the ETF method works well. However, it does include fees, which bite into potential profits over time. Further, if there ever is a run on gold, paper positions may turn worthless. While this possibility seems extreme, it’s also the reason a number of investors stick with gold coins instead. Regardless of the investment format, however, both will gain or lose value as gold in general rises and falls. Neither approach has a value advantage over the other.
Under : Analysis
Class Tags: Emerging Markets, European Central Bank, Exchange Traded Funds, Gold Spot Price, iShares Gold Trust, Sovereign Debt, SPDR Gold Trust