Gold continues to shine as the best safe haven
Gold has retained its status as a safe-haven investment, despite the rising strength of the US dollar and turmoil elsewhere in commodity markets.
The price has remained stable in 2014 and what’s more, experts believe that the long-term outlook for the precious metal is well supported over the coming year. The price of gold ended 2014 almost unchanged on 12 months ago, closing on Wednesday at around $US1,184 ($1,449.48) an ounce after starting the year at $US1,205. Fears of a crash in the price were overblown.
Goldman Sachs has now set its long-term forecast for the price of the yellow metal at $US1,200 an ounce for the next three years.
The investment bank estimates that this is the break-even price for the majority of gold miners once all costs such as exploration, management and mine repairs are included.
As such, the price of gold may well fall below $US1,200 in the year ahead, but lower prices would force loss-making miners out of business and reduce supply, helping prices to recover eventually.
Mark Bristow, chief executive of FTSE 100 miner Randgold Resources, has said: “The [gold-mining] industry is clearly stuffed at $US1,140 and it will be a bloodbath at $US1,000.”
Hunter Hillcoat, from broker Investec’s natural resources team, has set a price forecast of $US1,150 an ounce for next year. The Investec team sees a resurgence in the US dollar, rising interest rates and falling inflation as challenges for the year ahead.
The price of gold has an inverse relationship with the world’s reserve currency, the US dollar. A fundamental shift in American monetary policy last year has removed the main driving factor behind the price of gold during the past decade.
As the price of gold has fallen from a peak of $US1,900 in May 2011, investors have reduced their exposure. Holdings in gold exchange-traded funds, which allow investors to buy shares in a fund that tracks the gold price, have fallen in the past 12 months.
ETF Securities said that $US561m of investor money had exited its gold funds in the past year, bringing total assets to $US9.6 billion. Global demand for gold has been weak during the past three years. The latest figures from the World Gold Council showed year-on-year gold demand falling by 6 per cent in the three months ended in September. Jewellery demand declined by 4 per cent, while bar and coin demand slumped by 21 per cent in the third quarter.
The longer-term outlook for gold demand remains stable. Jewellery purchases of 534 tons, which make up more than half of total gold demand at 929 tons, are supported by strong buying across India and China. In India, demand jumped 60 per cent during the third quarter, according to the World Gold Council and, when combined, India and China make up 54 per cent of global gold buying.
The Reserve Bank of India unexpectedly removed rules on importers in late November that required them to sell 20 per cent of their shipments for re-export, the so-called 80:20 rule. The resurgent US economy is also fuelling global demand for jewellery purchases.
Central banks have also been accelerating gold purchases ever since quantitative easing began in early 2009. Central banks added 93 tons of gold to reserves in the third quarter, with more than half of all buying coming from Russia, according to the World Gold Council. Central bank purchases are expected to hit more than 400 tons for the full year, in line with 2013.
China is buying huge amounts of gold as it seeks to increase from the current 1 per cent of reserves. Alternative ways of protecting wealth, such as a bank account or government bonds, have all seen rates of interest destroyed by monetary stimulus.
With negative rates on some of the safest bonds in the world, such as Switzerland and Germany, and once adjusted for inflation, investors are also paying banks to hold their cash.
So how do investors get access? Luckily, there are plenty of low-cost options. Popular physical gold exchange-traded funds include ETFS Physical Gold (PHGP), denominated in sterling, and ETFS Physical Gold (PHAU), denominated in US dollars. For those who want to own gold coins or bars, there are established dealers such as ATS Bullion, BullionByPost, and Chard.
The first rule of investing is capital preservation. The resilience of the gold price is a canary in the mine of the global economy, showing that investors think the anaemic recovery could rapidly unravel without being propped up by money-printing.
The future is uncertain and gold is the most effective insurance against that.
Read more about Gold as the best safe investment: smh