Gold retains position as safe haven for 2015

(December 30, 2014 - by John Ficenec, The Telegraph)

Mark Bristow, chief executive of FTSE 100 miner Randgold Resources, has said: “The [gold-mining] industry is clearly stuffed at $1,140 and it will be a bloodbath at $1,000.”

Hunter Hillcoat, from broker Investec’s natural resources team, has set a price forecast of $1,150 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 this 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 $1,900 in May 2011, investors have reduced their holdings. Holdings in gold exchange- traded funds (etfs), which allow investors to buy shares in a fund which tracks the gold price, have fallen in the past 12 months. ETF Securities said that $561m of investor money had exited its gold funds in the past year, bringing total assets to $9.6bn.

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 6pc in the three months ended in September. Jewellery demand declined by 4pc, while bar and coin demand slumped by 21pc in the third quarter.

The longer-term outlook for gold demand remains stable. Jewellery purchases of 534 tonnes, which make up more than half of total gold demand at 929 tonnes, are supported by strong buying across India and China. In India, demand jumped 60pc during the third quarter, according to the World Gold Council, and when combined India and China make up 54pc of global gold-buying.

The Reserve Bank of India unexpectedly removed rules on importers in late November that required them to sell 20pc 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 1pc 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, much like falling yields on UK gilts, 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. A balanced portfolio should hold an allocation of about 5pc in assets such as gold. The future is uncertain and gold is the most effective insurance against that.

 

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