Gold fever: in sickness and in wealth

Gold fever: in sickness and in wealth
05 June 2013

Is now a good time to buy gold?

Before I comment, let’s look at what drove the gold price up to near $2,000 an ounce levels in 2009. The price increase happened because of a ‘flight to safety’ response.

Equities down, commodities up

After the global financial crisis and the subsequent concerns about equities, bank debt, sovereign debt and the long term effects of quantitative easing (money printing), investors, turned to gold as a safe bet because it has been around for thousands of years as a currency and a store of value. It was felt that as gold would continue to offer protection with all the uncertainty around in the world.

In recent months, the continued and sustained QE has led many investors to believe that this is almost the ‘norm’ and they have started to look at equities again. While government debt has continued to build and build, corporations have spent the last five years sorting out their balance sheets and are now in good financial shape, with little or no borrowing, record amounts of cash on the balance sheets, and profits that are starting to grow.

Meanwhile, major indices, led by the Dow Jones in the USA, have quietly recovered, and equities are attractive again.

Companies are doing well, profits are growing, dividends have been maintained, so the time has now come to consider taking some profits from gold and moving into equities. As momentum for this argument builds, as is often the way, there has been a large sell off of gold which caused the price to drop over 10% in a few days.

Gold is unpredictable

The bottom line is that gold is unpredictable. Even Acuma’s Chief Investment Officer states that he doesn’t really understand the drivers for gold! He quotes the American business magnet Warren Buffet, who wrote about gold in his annual report, and basically said; you have two choices:

1)  Buy all the gold produced in the world (approximately 170,000 tons). It will cost you USD 7,5 trillion. That investment will give you no dividend or coupon payment.

2) With USD 7,5 trillion, you can buy all the Dow Jones companies twice and get the annual income as long as they are around.

Having said that, going back to the points I mentioned earlier about the flight to safety, most of those issues are still with us, and will continue to be around for the foreseeable future. Therefore I can understand why investors would like to hold gold, and because of that I do not see the gold price collapsing.

But, I do believe it will remain volatile as investors decide whether it is good value or not.

Have you bought into the gold rush? What's your take on it? 




  • Colin

    I'm personally in the Buffett camp, gold has too many unknown, unknowns to be a good investment. On the back of Nouriel Roubini and Credit-Suisse predicting gold will fall to US$ 1100 between the end of 2013 and 2015 its very interesting to note that the Indian Finance Minister has urged banks to advise their customers NOT to invest in gold, (India has long been the biggest buyer of gold). The Indian Reserve Bank has also advised banks not to sell gold coins and the government has raised the gold import duty. Will this have the desired impact and quell the irrational exuberance? Only time will tell.

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