Gold price volatility pits bullion bulls against paper bulls


The worst one-day spot price fall for 30 years in the gold market in April has raised the stakes in the ongoing battle between those who prefer physical gold, versus those who believe in investing in asset backed paper.

The initial shock over, the gold bulls charged back, insisting the correction would draw buyers back. “The recent breakdown in the gold price could be the capitulation some investors have been waiting for,” said Angelos Damaskos, CEO Sector Investment Managers and fund adviser, Junior Gold.

But as the Dow Jones index finally reached its pre-2008 crisis high, breaking through 15,000, the paper bulls called the end of the gold run and the start of the ’great rotation’ out of bonds and safe-haven asset classes, back into equities. Fears of inflation, they said, were entirely misplaced.

The debate rages on. After each episode of geopolitical instability, such as that provoked by the Eurogroup’s mis-handling of Cyprus’ debt, where politicians enforced taxation on insured depositors’ savings, gold bulls feel vindicated. Tensions in Africa, the Middle East or Korea could make the Cyprus debacle look insignificant.

Gold supply remains limited with production growing by just over 9% in the past 10 years. Central banks, especially in emerging markets have been net gold buyers since 2010. Chinese demand, as in other sectors, underpins gold price rise projections, whether in an inflationary or deflationary scenario. “In times like these, some insurance against the unexpected is necessary. This has been the function of gold since antiquity,” Damaskos said.

Ted Scott, director of Global Strategy at F&C, said gold’s dramatic fall was due largely to transient technical reasons, and the long-term strategic case for gold as part of a diversified investment portfolio still stands.

An outstanding asset

“As the financial crisis continues to deepen and central bank policies fail to create the growth or inflation to reduce debt burdens, the authorities will resort to even more extreme and unconventional policies,” Scott said.

“This will ultimately result in the nationalisation of banks to ensure credit growth is reflected in the broader economy resulting in the higher inflation necessary to erode debt. In this scenario, gold is the outstanding asset to hold.”