Many managers and strategists say they cannot understand why investors buy gold. Yet the price has risen steadily, and shows little sign of softening.
A rebounding commodity
Gold’s previous all-time high on 4 May (at $1,541/oz) was eclipsed on 6 June at the pm London fix at $1,549/oz.
Dips on short-term factors, such as the Glencore listing, has not affected the overall price trend upwards. Gold, Grubb says, is the one ‘commodity’ that has rebounded even as others have softened.
Global central banks divided into two groups some years back on gold policy. One group, mostly in developed, western markets, were net neutral on gold, and more likely to be sellers, while the second group, mostly in Asia and Latin America, were buying gold to re-balance their mounting foreign exchange reserves.
China famously was one of the early buyers, but more recently, Mexico has led the market.
Gold demand has remained robust in Asia, where increasingly affluent populations and inflationary pressures are supporting the investment and jewellery sectors.
“If the fear trade diminished sales in Q1 in Europe, demand kept going in China and India,” Grubb says.
The WGC is working to help investors access different types of gold holdings. It has long been a partner with State Street, which runs the $56bn US SPDR gold fund, and is now partnering with ETF Securities in Europe to market two Europe-listed Gold ETFs worth $11bn.
Last year, the WGC acquired a 10% stake, alongside co-investor Rothschild Investment Trust, in UK-based online gold provider Bullion Vaults, which manages more than $1bn in assets vaulted in New York, London and Zurich.
The range of projections for the gold price has widened over the past two quarters as opinion becomes more sharply divided.
Société Générale Private Banking strategist Xavier Denis notes gold has exceeded the threshold of $1,500/oz, his previous target.
“Several factors have combined to raise the price of this precious metal: geopolitical risks in the Middle East, renewed concerns over Greece’s budgetary situation, the perspective of American interest rates remaining flat for a long time, and especially the return of inflation,” he says.
“Yet beyond these contextual factors, a number of structural factors continue to attract investors. In 2010, central banks became net purchasers of gold for the first time in more than ten years. Private investors have turned to buying once again via ETFs, whereas they had begun to stabilise their positions at the end of 2010.
American monetary policy provides the primary factor behind higher gold prices and this should not change before 2012.
“As long as short-term interest rates remain so low in the US, gold will have very good reason to increase in value. We feel that the price of gold could continue to rise over the next few months and even top $1,700/oz by the end of the year.”
Grubb says gold’s relevance to investor portfolios is, if anything, growing. “Analysts tend to divide into two groups: what he calls the “mean reverters” and the
Mean reverters, typically the sector and equity analysts at investment and private banks, look at long-term trends and deliver a view which is not too far out of range.
“They say the gold price will go up a bit and down a bit but eventually settle somewhere in the middle where it is not too uncomfortable,” Grubb says.
“Fundamental analysis looks at supply and demand. Supply is constrained and increasingly expensive. Demand shift is not about commodities or even the super cycles of Asian economies. It is countries such as China becoming a net importer of gold when it was not before. Would you say Asian households are going to be richer in ten years’ time than they are today? I would say so, so I am in this camp. I can’t give you a number, but I think gold will be higher then than today.”