WHAT OTHERS ARE THINKING

ABC Radio Australia: Finance correspondent Karon Snowdon talks about the fear of a Greek default; the battle over the USA's debt ceiling; economic prospects in Asia and what it all might mean for the price of gold.

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WHAT OTHERS ARE THINKING

Reposted from GoldCore Blog (19 July 2011)

Many market participants are expecting a correction in gold at the psychological level of $1,600/oz.

This is quite possible given corrections often take place after reaching record round number highs. Also, corrections tend to happen when there is a lot of noise in the press and media.

Gold’s record high in all currencies is front page news in the Financial Times today which would make any contrarian nervous that the recent move is overdone. However, coverage remains very muted in much of the non specialist financial press – many of whom barely covered or did not even mention the new record gold highs.

The man or woman in the street, in Europe and much of the western world, remain blissfully unaware of gold’s rising price and unaware of gold’s importance as a store of wealth and an important diversification.

Gold is not overvalued – especially in the long term but even in the short term.

Gold at $1,603/oz is only 2.5% above the recent record nominal price seen on April 29th at $1,563.70/oz. Thus, gold has had a two month correction and consolidation prior to reaching the new nominal highs over $1,600/oz.

Year	Start	End	Gain	Percent
1979	$234.40	$563.20	$328.80	140.27%
1973	$65.10	$112.25	$47.15	73.56%
1974	$112.25	$186.50	$74.25	66.15%
1972	$43.48	$65.10	$21.62	49.72%
1978	$170.30	$234.40	$64.10	37.64%
1977	$137.00	$170.30	$33.30	24.31%
1971	$37.44	$43.48	$6.04	16.15%

Year to date in 2011, gold is only 13% higher in dollars, 7% in euros and 9.4% higher in sterling.

Therefore, it is quite possible that gold targets the next psychological level of $1,700/oz, prior to any meaningful correction.  Higher prices in euros and pounds are especially likely, prior to a correction.
It is worth remembering that in the 1970s gold bull market, gold had annual appreciation of some 30% per annum and had moves of over 73% in 1973 and 66% in 1974 (see table above).

Gold only went parabolic in 1979 when it rose by over 140%.

The conditions today are worse than the 1970s when the U.S. was a net creditor nation and not a net debtor nation – the largest debtor nation the world has ever seen.

‘Armageddon’ has been warned of by President Obama if the United States fails to raise its debt ceiling.

This may be hyperbole used in debt ceiling negotiations with obstinate Republicans but there are many banking analysts, economists and leading financial experts (the ones that predicted the crisis and the continuing crisis) who concur with the American President and are genuinely concerned of an economic meltdown.

We are a long way from gold mania yet and gold coverage in the non specialist financial press remains muted – despite the ‘perfect storm’ for rising gold prices.

More importantly, gold and silver bullion ownership among the population remains very low.

As ever, investors would be better served buying gold and silver on the dips and dollar (euro, pound and Swiss franc) cost averaging into allocations.

Attempting to time corrections and speculate on short term moves is extremely difficult and should be avoided by retail investors and all but the most experienced traders

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WHAT OTHERS ARE THINKING

Gold has reached a key psychological level of US$1,600. Here's two video's featuring analysts discussing where the gold price could be going from here.

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WORLD OF GOLD

The price of gold for immediate delivery reached a record high of US $1,578.55 on Wednesday, its eigth consecutive daily rise. The metal also hit record highs in UK sterling, euros and the SA rand.

Meanwhile Bloomberg said silver futures for September delivery rose US$2.517, or 7.1 percent, to US$38.151 an ounce on the Comex, the biggest gain since March 19, 2009.

Platinum futures for October delivery gained US$30.70, or 1.8 percent, to US$1,767 an ounce.

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WORLD OF GOLD

The price of gold is soaring again. Gold futures for August delivery gained $13.10, or 0.8 percent overnight to settle at $1,562.30 an ounce on the Comex in New York . The previous record was $1,557.10 on May 2, when the intraday price reached an all-time high of $1,577.40.

“It’s a continued flight to safety into gold,” Frank McGhee, the head dealer of Integrated Brokerage Services LLC in Chicago told Bloomberg. “People are worried the debt crisis will spread to Spain, Italy, and ultimately, the U.S.”

Recent performance - the gold price in Australian dollars (Source: Thomson Reuters)

Sustained rise - the price of gold in US dollars (Source: Thomson Reuters)

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WHAT OTHERS ARE THINKING

Independent analysis by Oxford Economics suggests that gold’s share of an optimal portfolio is around 5% in a base long-term economic scenario featuring 2.25% growth and 2% annual inflation1. The optimal allocation rises in a more inflationary long-run scenario and also does so for more risk-averse investors in a scenario featuring weaker growth and low inflation.

The World Gold Council commissioned the study entitled ‘The impact of inflation and deflation on the case for gold’. Marcus Grubb, Managing Director of Investment, the World Gold Council, said: “This research comes at a time when high inflation is an ongoing reality for many developing economies, while Western economies face the threat of protracted low growth, low inflation or even deflation. In this context, we wanted to understand why gold is being reconsidered as a risk management asset, particularly if one of the many divergent inflation scenarios came to pass.”



Key findings of the report are:

• Gold performs relatively well compared to other assets in a high inflation scenario as well as in a deflationary period.

• Due to its lack of correlation with other assets gold has a useful part to play in stabilising the value of a long-run portfolio even if a modest negative real annual return is assumed.

• Gold’s optimum share of an investor’s portfolio is around 5% in a base long-term case for the UK featuring 2.25% growth and 2% annual inflation1. This is a higher allocation than seen in typical mainstream portfolios, although the analysis does not include other assets such as index-linked bonds, foreign securities and other commodities.

• Gold’s optimal share in an efficient portfolio rises in a more inflationary long-run scenario and also does so for more risk-averse investors in a scenario featuring weaker growth and low inflation.

Read the full World Gold Council media release.

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