The Conversation (0)
Overall, the gold price is up 11 percent in the last three months, and over the last year the spot price is up by 24 percent. The price of physical gold has outperformed most other major asset classes following the global financial crisis, appreciating by approximately 67 percent while equity markets, are still in negative territory.
The price of the yellow metal began the year strong, before declining briefly for a month and beginning a relatively steady climb. Gold continued to set new high levels that recently broke through the $1,400 per ounce range. Currently, the gold spot price market price is trading at $1,398 per ounce, following an all time high of $1,423.75 per ounce on December 6.
Overall, the gold price is up 11 percent in the last three months, and over the last year the spot price is up by 24 percent. The price of physical gold has outperformed most other major asset classes following the global financial crisis, appreciating by approximately 67 percent, while equity markets are still in negative territory. Ironically, the price of base metal copper has also yielded a compelling return, having increased 35 percent. However, precious metal counterpart silver seems to have shown the greatest appreciation, up by 96 percent since January 2008.
The price of gold is often inversely correlated with copper, as the demand for gold has historically increased during periods of financial and geopolitical instability. Copper, on the other hand, is oftentimes given the name of “economic bellwether.” When the global economy is strong, historically copper prices appreciate in value. Copper soared 140 percent in 2009, and this year’s rally seems to have been fueled by Chinese buying, tightening stockpiles and sentiments for a slowly improving global economy. The emergence and tremendous growth of ETFs provides context for the simultaneous appreciation in both gold and copper.
Fundamental Shift
Demand for gold has traditionally been a function of three market forces: jewelry, investment and industrial demand. Global demand in the jewelry market, with the exception of China, has demonstrated significant price elasticity, as many consumers are choosing relatively lower priced alternatives. These thoughts are underscored by Neil Meader, research director at GFMS, “while jewellery demand in China continues to increase, the Indian market is down. So is demand in the United States – the world’s number 3 market – where gold sales to jewellers have plummeted about 50 per cent over the past four years.”
As industrial demand is only attributable for 10 percent of activity, the tremendous spike in investment demand has been the primary and dominant catalyst for growth, with decline in jewelry sales contributing relatively little impact on prices. Investment demand for gold is most notably seen in the rise and success of physically backed gold ETFs such as SPDR Gold Shares (NYSE:GLD), which has acquired nearly 1,300 tonnes of gold worth about $58 billion – a considerably larger gold holding than Switzerland’s central bank.
Future Outlook
Forecasting future price targets for gold in the current market seems disconnected from analyzing gold’s longer term fundamentals or supply and demand relationships, and more about analyzing market psychology, a tremendous deficit of confidence in most asset classes, and the predominance of a ‘disaster mentality’ or proverbial ‘flight to quality’. On one hand, it appears that precious metals, including platinum and palladium, are discounted as safe havens, and virtually the only investment vehicles that can be trusted. However, the demand for copper indicates the presence of considerable pressure from institutional and retail investors placing a degree of faith in the prospect of a slow global financial recovery. When and if other asset classes start to regain the market’s trust, the need for a safe haven is less compelling. However, many analysts do not forecast this happening in the short to medium term, particularly with the US dollar under renewed pressure and European sovereign debt fears threatening banking sector contagion.
Although many analysts and investors may observe the last decade of appreciation in the precious metal price as unrestrained exposure to unsustainable growth, Eric Sprott seems extremely confident in the yellow metal’s current market valuation. Mr. Sprott, Chief Executive Officer for Sprott Asset Management recently commented, “I think gold is the reserve currency today. There is not a currency in the world that it hasn’t appreciated against by at least 300 per cent. And it has beaten every stock market. You can’t even rent a safety deposit box in Germany because they are all full of gold and silver … I am pretty convinced that gold will go a lot higher because it is under-owned as only 1 per cent of people’s money is in it. It could go to $2,000 an ounce. I could imagine it at $5,000.”
Gold Equities
Pierre Lapointe, global macro strategist at Brockhouse Cooper, has noted that the current ratio of the price of gold to the U.S. gold stock index is about 6.5, which is well above the ratio’s historical mean of 4.4 for data going back about 25 years. This recent divergence could mean that gold stocks have yet to reflect the increase in the underlying commodity, or it could mean that the commodity has overextended its rally and that stock investors do not believe the bullion rally is sustainable.
Australian gold shares have outperformed during the entire 2010, but particularly over the last 6 months, due to corporate activity, exploration success, and a market correction from the restructuring of the proposed ‘super profits’ tax. This is despite the Australian dollar gold price actually falling by 6 percent over this period. Over a one year period, the Australian gold companies have appreciated by 37 percent.
Canadian gold miners over the course of the year have consistently produced average investment returns just slightly ahead of physical gold prices. The largest disparity is in the 6 month comparative time frame, which saw Canadian gold equities outperforming with 17 percent returns, a premium of 4 percent to the COMEX gold price appreciation in US dollars per troy ounce.
United States gold mining companies have performed in line with the physical price of gold over a 12 month period; however, most recent quarterly returns will be disappointing with an average of only 2 percent growth compared with Canadian companies averaging 14 percent.
The South African gold miners have consistently underperformed over the course of the year, with investment returns in physical gold yielding superior results compared with holding South African shares. Although still lagging the physical gold price for the most recent quarter, a respectable 9 percent increase for South African companies demonstrates a relative improvement.