Tuesday, 12/31/2013 11:25
2014 finds gold investment shunned by trend-following money managers in the West...
GOLD has had worse years than 2013, but not many, writes Adrian Ash atBullionVault, in this article first published at ThisIsMoney.
Dropping more than 27% this year against the US dollar, gold suffered its worst year since 1981 (down 32%) and worse yet than 1975 (down 25%). But perverse as it sounds, 2013 proved gold's role as financial insurance.
For UK investors over the last 40 years, as this annual asset performance comparison shows, gold priced in Sterling has lagged the returns from the stockmarket (including dividends), gilts, cash savings and UK house prices 16 times. It has beaten those assets only eight times. In those years however, the gains on gold far outweighed its losses under better economic conditions, beating those other assets' average 3.8% return by 46 percentage points. Overall, gold has delivered 11% annual gains since 1973, second-only to the total return from the FTSE (15.4%) and comfortably beating the pace of inflation as the Pound has steadily lost purchasing power. But with stock markets surging this year, it was only natural that the price of financial insurance would fall.
2013 also proved that China's surging gold demand does not, as yet, set gold prices worldwide. Western money managers still hold the whip hand, and it was their about-turn in sentiment which sparked the crash in gold prices this spring. This change in sentiment had various roots. Boredom with six years of financial crisis. The sharp rise in equities. Growing expectation that the US central bank, the Federal Reserve, would start to reduce its QE money printing. Trend-following money managers ran for the exits from gold, shown clearly by the sharp fall in gold ETF holdings. From the record-high holdings of December last year these giant trust-fund vehicles shed one-third of their gold in 2013. That turned what had been around 250 tonnes of annual demand since the gold ETFs were launched a decade ago into 800 tonnes of supply. Turning over some 4,500 tonnes per year, the gold market buckled.
Yes, Chinese households and investors proved eager buyers, snapping up all that gold and more besides. Like a growing number of private investors in the West, they took the price crash to be an opportunity, adding to their gold holdings as a long-term investment. But their demand leapt as a result of the price drop, and it was the positioning of speculative traders in US gold futures and options which weighed heaviest of all. From a strongly bullish stance, hedge funds and other leveraged players as a group raised their betting against gold prices to the highest level since 1999, the very low of gold's two-decade bear market.
2013's deafening chorus of bearish forecasts from bank analysts also matches that historic turning point. All a bloody-minded contrarian would need now is for a Western government to start selling gold. But Gordon Brown is long gone. The idea of selling Cyprus' small gold reserves was merely discussed, not actioned in spring. Western central banks continue to hold gold close, and emerging-market governments continue to buy. When asked, they all name gold's insurance function as the No.1 reason.
Looking to 2014, events in India could be important. Formerly the No.1 consumer nation, it is now locked out of the global gold market by import restrictions aimed at cutting India's trade deficit, in the hope of supporting the Rupee without stronger interest rates. Any relaxation of the government's rules could support prices if Western selling continues. But metal is still flowing into the former No.1 market regardless, but without any duty being paid and with criminals enjoying a 10% margin over legal suppliers.
The strategic question for gold bulls, and longer-term allocations, is whether the drop of 2013 will prove to have been 1981, when gold sank from then record-highs to begin a 20-year drop. Or was it more like 1975, when central banks talked tough in inflation but then failed to follow through with strong-enough interest rates? That reloaded gold's long bull market on the 1970s, clearing hot money out of the trend and then sending prices eight times higher as resurgent inflation saw stock markets and the returns to cash savers collapse in real terms.
Here sentiment amongst Western money managers and hedge funds will again prove decisive. Further tapering by the US Fed may already be priced into gold, but the mere idea of less QE helped spark the spring 2013 crash. Less money printing, however, won't change the zero interest rates or record peace-time debts being worn by savers and investors across the West as 2014 begins.
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