Don’t believe the nasty talk about gold. But don’t...
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Aug 04, 2015  |  Vote 0    0

Don’t believe the nasty talk about gold. But don’t buy the stuff, either: Olive

OurWindsor.Ca

That gold has plummeted in value is no surprise. All investing mania go too far, and the decade-long bull market in the precious metal is no exception. But the developing consensus that gold is heading toward extinction as an investment class is both surprising and misguided.

“Gold is doomed” is the headline for Matt O’Brien’s recent Washington Post examination of why its price has fallen 42 per cent since its most recent peak, in 2011, and experienced a stunning drop of 8 per cent in June alone. Gold closed last week at $1,085 (U.S.), down from its 2011 peak of $1,895 (U.S.).

“Gold is out of fashion like flared trousers: no one wants it,” Robin Bhar, a London-based analyst at Société Générale S.A., France’s third-largest bank, told Bloomberg News last week.

Iain Stewart, who runs the Newton Real Return fund in the U.K., is highly regarded for his fund’s superior results, managing clients’ money with a cautious strategy that emphasizes preserving capital over high-risk, high-return bets.

Just the same, Stewart conceded in a recent U.K. Daily Telegraph interview that the small portion of his fund committed to gold has “been the worst investment in my 30-year career.”

To be sure, as Toronto-based mining giant Barrick Gold Corp. prepares to announce its second-quarter earnings Wednesday, its principal product belongs in the investor doghouse.

The yellow metal has been humbled along with other commodities — most conspicuously oil and gas, but also sugar and copper and other base and precious metals — as the climb of commodity prices ended with the halt of China’s infrastructure building boom two years ago. Not coincidentally, that’s when the gold price broke out of its upward trajectory.

Beijing’s wise pre-empting of an economic overheat ended the latest “super-cycle” in commodity prices, with help from the continuing European financial crisis and a chronically slow-growth Japanese economy.

Traditionally, gold has been regarded by its supporters as a sanctuary from ruinous inflation. In recent years, though, the world’s great economic spectre isn’t inflation, but rather deflation — stagnant economies worldwide, with prices and incomes actually falling or threatening to do so.

The world food supply remains under stress, so that agricultural-commodity prices alone have held up well. Gold, by contrast, is one of the few leading commodities that is not actually consumed, save for jewellery markets, particularly in China and India, which so far have not increased their buying despite the lower gold price. Otherwise, gold is a notoriously soft metal with few applications.

As an investment, gold is bought on fear. “Gold tends to have a very weak fundamental trend because it’s mainly held for psychological reasons,” John Stephenson, CEO of Toronto’s Stephenson & Co., recently told Bloomberg Businessweek in explaining why he is continuing to short-sell gold, anticipating an even lower price. The number of global hedge funds with short positions on gold — betting on a further price drop — is close to a record high.

Yet it must be said, putting aside the sour regard that Warren Buffett and others have for gold as a “barbaric” investment, that there was much profit to be had from gold investing between 2000 and 2011. (Inexplicably, the gold bull is often described as a 13-year-long phenomenon, even though prices fell through 2012 and 2013.)

If during the early 2000s trough in the gold price you had bought the metal, then sold it at its 2011 peak, you would have more than quadrupled the value of your investment. Of course, that would have required unusual sagacity and discipline in not waiting in 2000 for the price to get still cheaper, and at the 2011 peak in not hanging on to gold in hopes of a still higher price.

But our current world of worries, for which gold is a supposed to be the ultimate safe haven, has turned against the precious metal, thanks to the global deflationary threat and a sense that the gold-price upswing has run its course.

The herd mentality means investments that fall out of favour are dumped in their entirety, quickly and en masse — as we’ve seen with oil. This panic selling is often cited as the chief culprit in the gold-price plunge.

Investors in the stock of gold producers have also taken a big hit.

Shares in the seven largest Canadian gold producers by market capitalization have dropped by an average of 50.1 per cent in the past year.

Barrick, the world’s biggest gold producer, has lost 56 per cent of its stock-market value, while piling up staggering total losses in the past three years of $17.9 billion (Cdn.). On July 22, Barrick stock hit a 25-year low. For Toronto’s Kinross Gold Corp., 2014 marked a fourth consecutive year of losses, totalling $12.3 billion (Cdn.).

And yet there is a “floor” to the gold price. Doomsayers aside, traders expect the price won’t fall below a range of $700 (U.S.) to $950 (U.S.). The recent gold-price forecast from HSBC PLC, the U.K. banking giant, is an average of $1,160 (U.S.) in 2015, $1,275 (U.S.) next year, and $1,300 (U.S.) in 2017.

In the context of $300 (U.S.) gold in 2000, those forecasts should comfort all but the least disciplined buyers, those who bought at or near the peak.

What’s behind this optimism among those keeping the faith in gold?

The rush for the exits by gold sellers is pretty much over. An anticipated U.S. Federal Reserve Board end to a six-year period of cheap money, expected with a hike in the U.S. key interest rate later this year, has already been factored into the gold-price decline. And as Milton Berg of MB Advisors recently told Bloomberg News, the shares of gold miners that are operationally sound have been hit so hard they now have upside potential.

This space has never been a fan of gold. If not barbaric, gold certainly is volatile, is not accepted as payment at Petro-Canada, pays no dividends or interest, is costly to store, and unlike residential real estate is an investment class that will not continue to provide you with shelter even if its market value collapses.

And, truth is, even accounting for the 2000s bull market, on an inflation-adjusted basis, gold has steadily lost value — by an average of 1.3 per cent a year — in the three and a half decades since its all-time high, in 1980.

Even on a nominal basis, the 148 per cent gain in the gold price over those 35 years — a modest 4.6 per cent per year — compares poorly with household-name stocks you could have bought and held since then.

Those include American Express Co. (up 2,834 per cent since 1980), Procter & Gamble Co. (3,175 per cent), Coca-Cola Co. (5,379 per cent), Intel Corp. (6,196 per cent) and McDonald’s Corp. (7,943 per cent). And that doesn’t include those stocks’ dividend payouts.

You have to be an astute speculator to profit from gold, timing the market with Delphic expertise. That gift is rare enough that Warren Buffett claims not to possess it. (And he has often given proof of that fact.)

The ideal investment, for the vast majority of us, is low-maintenance. You can not “buy and forget” gold; it requires constant attention. That’s fine for the cult-like goldbugs who derive pleasure from doting on their precious-metal investments. But it’s ill-advised for the rest of us, and always will be.

Toronto Star

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