I think most of you remember the Dutch bank ABN AMRO. Last month they came out with an analysis titled: It’s Not All Gold That Glitters.
I present the translation, from which you can read ABN AMRO is trying to change thousands of years of history by saying gold’s safe haven status should be revised, all because the price of gold did not behave as they expected in recent years. An interesting read from a parallel universe.
It’s Not All Gold That Glitters
03-05-2014
In uncertain times investors seek safety in gold, but gold isn’t the safe haven it used to be, according to experts.
The volatility in the price of gold is getting a lot of attention from investors world wide, more than ever. Janet Yellen, chairman of the Federal Reserve, said last year to have no insight in the fluctuations. According to Yellen there is no economic model that explains why the price of gold goes up or down. The precious metalappeals to the imagination for decades. It’s scarce, immortal and is een globally as valuable. A safe haven for people that fear currencies and stocks will drop in value or political and economic problems. Different from other commodities the supply of gold is less important for its price. The majority of all the gold ever mined is still in circulation. For example in the form of coins and jewelry. Owners can bring gold relatively easy back in circulation. The price of gold is mainly determined by demand.
By rising demand in times of uncertainty the price of gold will rise. The price goes down if trust in financial markets increases and investors sell gold. This was how it worked before the financial crisis. At this moment the direction of the gold price is extremely unpredictable.
Georgette Boele, precious metals specialist at ABN AMRO, closely follows this market. On behalf of the bank she presents her analysis: “At the hight of the crisis – in 2008 – the gold price tumbled, although sentiment in financial markets was very negative.” The same happened last year. The price of gold fell the most since the 80?s on disappointing economic figures from inter alia emerging markets. “De link between stock market volatility and the price of gold is no longer self-evident”, Boele explains. The status of gold as the ultimate safe haven should be revised, according to specialists.
Where Is The Price Of Gold Headed
An important task of Georgette Boele, precious metals specialist at ABN AMRO, is to map all factors that can influence the price of gold. For investors who like to use gold as potential safe haven, as for investors who prefer to speculate on short term price movements. It’s all about estimating the effects of economical and political developments on the price of gold.
Boele: “ABN AMRO expects the price of gold to drop in 2014 and 2015. A consequence of positive sentiment in the US stock market and the expectation the interest rate in the US will rise as well as the value of the US dollar. In 2016 the balance between supply and demand will change in favor of gold and the price will then recover.”
Speculation
Boele sees multiple reasons which can explain why the price of gold is moving differently than in the past. “A major factor is the increased accessibility in the gold market for investors.” Until 2004 the price was mainly set by physical gold trade by investors and the gold price in the professional market. “The introduction of ETF’s (exchange traded funds or indextrackers) changed the influence on the price of gold significantly. ETF’s can be traded on a daily basis”, according to Boele. “The liquidity increased and investing in gold became more easy, also for speculators”. The speculators have a different incentive than gold buyers that aim to possess gold as a safe haven in uncertain times. “This became clear at the hight of the credit crisis in 2007 and 2008. The speculators had a shortage in liquidity and were forced to sell ETF’s and other gold financial products. As a consequence the price of gold dropped in times of economic uncertainty.”
Jewelry
Also developments in emerging markets were important. Gold plays an important role as a commodity for jewelries and a safe haven. Boele: “People in emerging markets are more likely to buy gold to protect themselves against currency devaluation. These people have experienced hyperinflation not so long ago.” We can also see gold investment rising if other markets are under pressure. Recent research pointed out that when Chinese real estate goes down, gold demand goes up.” Demand for gold in emerging markets is also influenced by the jewelry market. The size of this market puts an important floor under the price of gold. Gold is a common gift at marriages in India and at new year celebration in China. According to a recent study from HSBC, India, China, Indonesia, Vietnam, Hong Kong and Taiwan make up 60 % of global demand for physical gold. Although the amount of total imported gold is decreasing. Boele: “The cause is the import duty on gold in India, traditionally the largest gold importer. The government implemented this measure to decrease India’s trade deficit. Because of the import duty India has imported significantly less than in previous years. The import duty will not be revised as India needs to control their trade deficit.” Chinese demand for gold wil not have an impact on the price, Boele expects. In the past years Chinese demand was strong, especially in 2013, however, slowing growth will most likely cause Chinese demand to drop.
Various Investment Possibilities In Gold
There different instruments to invest in gold. For example futures, mining stocks and funds that invest in a basket of commodities. “The choice determines the riks and yield of the investment”, says Martijn Storsbergen, investments director ABN AMRO MeesPierson. He advices his customers to match their investments to their risk profile. “Choose a fund that invests in multiple commodities.”