Veritas: Gold’s prospects undimmed, for now

Could it fall? That is the question facing investors in gold, which easily beat both US Treasuries and the MSCI World index since 2000.

Recent price volatility has again brought the question to the fore of investors’ minds. However, before the end of gold’s run is pronounced, there are a number of factors to consider, not least of which is the European political overhang.

As Stefan Angele, head of Investment Management at Swiss & Global Asset Management noted last week “gold prices continued to rise” in the wake of the second bailout of Greece.

If, as a considerable number of economic pundits suggest, the latest deal with Greece has just bought more time rather than actually sorting out the root cause of the country’s debt problems, then this overhang ought to continue, thus perpetuating the use of gold as a safehaven asset.

Morningstar analysis published last week pointed to ongoing central bank purchases as perhaps the single biggest factor driving current demand for gold. This also suggests its price is unlikely to fall in the near term.



In line with the theory that gold is taking on an alternative currency place in the pantheon of assets – because of concern over fiat currencies, backed by promises from governments rather than gold in vaults – emerging market central banks have been buying it to help diversify their foreign currency reserves. Developed market central banks, which had been net sellers in the 1980s and 1990s changed their policies in the past decade. Thus, 2010 became the year when central banks around the world became net buyers, Morningstar notes. This buying spree is unlikely to last in the long term, but for now it remains a key factor in the price, Morningstar adds.

Other fundamentals remain tipped in favour of the price of gold remaining strong.

The Junior Gold Fund noted this past week the 24% rise in global demand for bars and coins in 2011 compared with 2010, as published by the World Gold Council. This is why the fund is buying into producers of gold.

The BlackRock Gold & General fund also noted the WGC report predicting that China will surpass India to become the world’s biggest buyer of gold in 2012, with Chinese demand growing another 20%. The fund’s managers equate gold equities to a “coiled spring”, ready to bounce on further confidence returning to global equities markets.

Supply side risks also suggest that gold prices could remain elevated. Consider, for example, the over 100,000 gold mineworkers who went on strike in South Africa in July 2011. This past week Bloomberg reported that three people had been killed in violence in South Africa’s mining industry. In this case it is linked to platinum miner Impala’s decision to sack over 17,000 mineworkers deemed to be on an illegal strike.

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