Gold is an asset which crosses so many boundaries, in terms of its definition – from raw material and precious metal, through to financial asset and safe haven in times of crisis.
However, in today’s financial markets and investors universe, where does the yellow metal now sit?
Investors have been desperate for yield
As an investment, gold does not pay anything in terms of dividend, offers no leverage, has to be safely stored and of course you only make when you guess the direction correctly.
In the current low interest rate environment, investors the World over, have been starved of yield on their money. Cash isn’t cutting it, and neither are bonds. Gold certainly isn’t, based on this metric.
What about inflation?
I had a really good look around, and presently in the major economies of the world, inflation is not an issue. This is usually a further factor in driving gold further – once again this isn’t in place.
And the mining sector?
Mining companies are complaining, specifically that in many cases, the gold prices are below their costs of extraction. Hence they don’t believe prices can go lower. That is a dangerous assumption!
While costs of extraction have increased everywhere, in mining, the commerciality of running a business has become even more important. Remember Lihir Gold? Remember Newcrest and its issues?
Let’s throw in a conspiracy theory?
We all love a great conspiracy story – how about the German Bundesbank and its request to have 674 tonnes of its gold repatriated to Germany from the US Federal Reserve. So far only 5% has been returned!
Ok there are all sorts of reasons for this – re-smelting to change the format to the “London Good Delivery Standard” and/or adjust serial numbers, transport issues, or perhaps the Fed has loaned or even sold it. Who knows!
Sounds like the plot line for Ocean’s 15 or whatever that franchise is now up to! However, the point is, they have yet to get their gold back. Assuming that it is the latter, well that would mean a lot of people have a vested interest in keeping prices low, to enable a re-purchase at some point, right?
Keep pushing paper prices down
Best to push down the paper price of gold down as this will make the job a little easier. The US Fed continues to keep the economic recovery on track, this also puts downward pressure on gold.
China and Russia love buying gold, as they have reported future plans for a gold backed currency as an alternate solution to the US dollar, and they want the price of gold down.
All the gold bugs and the “Doomsday Preppers” have already got as much gold as they can fit under their beds, and since the price is dropping they already feel like they are at a loss, so they won’t be buying more, so they are out of the game.
Anyone who fled to gold for safety has done so by now. These too are down on their investment.
So what does this all mean for the Gold price?
So this leaves gold with 1 option, an overall decrease in price over the next year or so. Sure there will be rallies within this, as there are in any trend, however, the down trend which began in April, will be hard pressed to find a support level unless there is a material change in the global environment – economically or geo-politically.
Sub a thousand dollars an ounce is very much a possibility and a reasonable expectation.
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