Tuesday , 18 June 2024

Has the Yellow Metal Lost its Lustre? (+2K Views)

The blaring headlines are expressing niggling doubts as to whether or not gold has enough power to sally forth: `The yellow metal appears to have lost its lustre’; `Gold price appears to be facing strong headwinds’; `Investors are advised that they can find better returns in other asset classes’. Words: 860

In further edited excerpts from the original article* Kishori Krishnan (www.goldinvestingnews.com) goes on to say:

Can Gold Pull Through?
What has brought on this turmoil? To understand this better, let’s take a look at the varied reasons being bandied around:

1. The weak US dollar has been a major driver in the price of gold but has recently been showing signs of stabilizing and could be about to turn upward.

2. Risk aversion is gradually returning to pre-crisis levels and inflation fears are abating.

3. The recovery from the deep economic crisis has been fast because of the stimulus measures backed by governments but may not be sustainable in the long-term.

National Bank Financial Group
A report by Stephane Marion, chief economist and strategist of the National Bank Financial Group reports that: “Investors who dared place some of their eggs in gold in recent years have been nicely rewarded for what they did but the time has come now to revise their positions. If the past 30 years are any indication, gold does not constitute an attractive investment over the long term. Moreover, in times of economic recovery, the return on gold falls well short of the return on the stock market.”

Goldman Sachs Group Inc.
There are other palpable reasons why the momentum will face a hurdle. According to Goldman Sachs Group Inc. history shows that, since 1988, the correlation between bullion and US inflation expectations is just 36 per cent, which means the price of gold rises and falls with inflation expectations 36 per cent just of the time.

Moreover, though risk premiums appear to be falling at breakneck speed, analysts maintain the Federal Reserve and its counterparts around the world would not hesitate to tighten monetary policy if inflationary pressures mount. Also, don’t forget, despite the structural challenges facing the US economy, the greenback appears poised to rebound on the strength of cyclical forces.

Analysts are also of the view that the price of gold has seen its highest value for the time being because the momentum indicator seems to be suggesting that the recent surge on the part of gold does not have the strength of previous moves and one should be on guard for a further reversal.

To understand why the bull-run has probably run out of steam, one needs to take a look at the situation with the gold mining industry … which is struggling because of rising costs and local currencies (SA rand, Canadian dollar and Australian dollar) that are playing spoilsport and appear to be offsetting the benefits of the higher price.

Coronation Asset Management
Coronation Asset Management portfolio manager Neville Chester maintains that gold has been the best-performing commodity over the past 12 months due to the “fear trade” during the global economic crisis. “The average grade of gold per ton of ore has fallen to 3,5g from 5g more than 10 years ago, which is a 40 per cent deterioration. It is costing more to mine less gold in the rock,” says Chester.

BNP Parabis
Parabis, too, has advised its investors about a substantial correction in the gold price maintaining that there is more downside risk because of long speculative positions and a possible dollar rebound. BNP Paribas says gold investors are overextended – on the US Comex gold futures market, the speculative net long position is at a record high and while the exchange-traded funds have been quieter, their holdings are also at record levels.

Société Générale
Metals analyst at Société Générale in London, David Wilson notes: “Macro-wise, I can’t see any significant reasons supporting gold. The data seems to still suggest that we’re in quite a significant deflationary environment.”

National Bank
Matthieu Arseneau, an economist at the National Bank, adds that gold “has acquitted itself well as a safe haven by outperforming the S&P/500 over the course of the past two recessions. However, it is important not to hold on to this investment for too long. Historically, the return spread has swung far in favour of the stock market in the two years following a market trough.”

Don’t invest in gold just because it’s popular. Don’t lose sight of longer-term historical investment results, especially during short-term periods of extreme volatility and trending markets. Short-term, return-chasing investing is precisely what is driving this modern-day gold rush and that is exactly why you should be looking elsewhere.