Barely a comment on gold passes these days without reference to "investors". A typical example of this was the comment of the prime gurus on the market research group GFMS in its latest survey just a couple of days ago. Since its analysts provide the data for the World Gold Council, it’s good to be up with their thinking. Well, they now put investors’ total stake in gold at knocking-on for $35bn, a figure which has soared from around $14 bn last year.
"Investment is to remain the key driver for 2008", says GFMS, in its look at trends emerging from trading in 2007. This backs up what top gold investor Graham Birch at Blackrock ML Mining and General said. He thought investors were 20% of the gold market last year.
Investors are key at the moment, because of the unhappiness with the gold price in Asian jewellery markets. Normally the main supporters of gold, jewellery customers in Dubai or Mumbai do not like its current volatility. When you buy your earrings or bracelets by weight, you want have confidence that you are getting the right number of ounces for your money!
Not that this has made GFMS, or other forecasters, pessimistic. GFMS is confident that the price could easily reach $1,100 this year. If not then, certainly next year!
The reasoning? What this amounts to, at core, is that there is too much bad news around financial markets for investors to go off gold. World credit markets are in a worsening state. But GFMS does warn that the trend lines on the charts will not going straight upwards. And, indeed, they are not. Having broken up into new high ground to reach $1,030 in mid-March, the price has slid back towards $900.
Most of the drivers behind investing are still there
"We were not at all surprised that the market saw a hefty correction in the last few weeks, as the speed of the earlier gains looked a little unsustainable," said Philip Klapwijk, GFMS' executive chairman in the report. "However, we do not think current hesitancy means it's game over for the rally."
And he added: "Many of the drivers behind this investor push after all — dollar weakness, skeletons in banks' closets — are still very much with us," said Klapwijk. "But quite where it will top out is a difficult call — maybe $1,100 is achievable this year, but $1,200 plus could be going a bit far".
The demand / supply balance is currently put at about even by GFMS. While it expects jewellery buying to fall by 200 tons, it believes investors will compensate. This is based on the interplay between investors and the jewellery sector in 2007.
Investors replaced jewellery in the second half of 2007
During the first half of last year, western investment fell but gold remained supported mainly by jewellery demand, GFMS said. Then investment was the key driver for prices from September onwards, as the credit crisis flared up globally.
"Driven by growing risk aversion, a weakening US dollar, a clearly problematic financial services sector and expectations of lower equity prices, investors have increasingly recognized gold's safe-haven attributes," Klapwijk said. The consultancy group expects the credit market crisis to persist in the medium term, fuelling continued risk aversion and creating a bearish outlook for the US dollar, the global economy and equity markets.
So, who are these investors, and what sends them to gold? You, me, hedge funds, mutual funds... anyone with savings. The World Gold Council is creating more and more of them by promoting the setting of Exchange Traded Funds around the world. These are currently the top investment medium. They’ve been nick-named the "People’s Central Bank" and are currently make up the 7th largest gold holding.
Exchanges are playing their part setting up new futures trading markets — India is the latest.
An important part in investor psychology is local currency. Those currently to watch, to go by the GFMS survey, are the Euro, Australian dollar, Turkish lira and Indian rupee. Price gains in non-dollar terms from these currencies were far more restrained than the previous year — so some investors were in less of a rush to hedge into gold.
Volatility was actually down on 2006
Interestingly, in spite of all the comment about the swings in the gold price and rising volatility, says GFMS, it actually was not that bad! Overall in 2007 price volatility was 16%, substantially lower than the 24% registered in 2006. Even the fourth quarter's volatility was unexceptional at just 20%.
Apart from the last two months of the year gold's dollar price volatility was lower, in the main, than during 2006. Volatility dropping markedly in the April — September period. Volatility then hotted up in the fourth quarter, but even so did not achieve the levels sustained in the second quarter of 2006, and even the first quarter of 2008 saw volatility much lower than in Q2 2006.
So, surprise, surprise, not everything in the newspapers is to be believed. Investors shying away from gold on fears of volatility were shying away from shadows, not reality. They are a nervy lot! However, this is why the investors’ continued participation should be treated with such caution.
GFMS notes this, and says the market is particularly frothy. Perhaps investors are not so wrong at wanting to lock their gains as fast as possible! As gold moves into new high territory it will become even frothier as investors’ caution rises.
In such an environment predicting the top for prices is a thankless task. Investors are not to be trusted! Still, GFMS believes that there are undoubtedly factors out there that could push prices over $1,100. Betting on $1,200 is on more uncertain territory! It depends on investors’ nerves.
Keep investing,
Erin and Isabel.
