To gold or not to gold 27 April, 2013.

To gold or not to gold  27 April, 2013.

“Should I buy gold?”

“Is gold going to fall below USD 1,300 per ounce?”

“When will gold price go back to USD 1,900?”

Many investors are asking these questions.  Gold price dropped by almost 10% on 15 April to USD 1,355.5.  It was a real shock to investors because gold price was at USD 1,600 level at the end of March.  What happened to all the good reasons to buy gold?  Hedging against inflation?  Euro crisis?  Korean peninsula tensions?  USD and JPY money printing machines?  So what caused the drop?  Some said Cyprus could be forced to sell gold and other cash strapped European countries might follow.  Some blamed it on China weaker economic data.  Well, we can all find reasons after the event.  Put yourself into the shoes of a fund manager.  You have been buying gold since Financial Crisis in 2008 and sitting on a reasonable profit.  Gold does not pay dividend or interest coupon and had a zigzag year in 2012.  Fortunately your stocks and bond portfolio have been performing.  With US stock market still at historical high level, US government and corporate bond prices in strength, some institutional investors are putting more money into stocks and bonds to follow the trend.  Gold price which had been falling since October 2012 from USD 1790 level, lost the heart of some institutional investors.  Considering gold price was below USD 700 for a little while in 2008 and had an amazing run to Sep 2011 to almost USD 1,900, the recent correction to USD 1,355.5 is at a halfway point of the upward slope created by the rally.  The bulls and bears battling in the midfield seem to be retail investors versus institutions.  In China and Hong Kong, there are consumers rushing to the jewelry store to buy gold bars.  On the side of the planet, the biggest gold ETF SPDR Gold Shares experienced nearly USD 13 billion of outflow this year and overall holdings in gold exchange traded products fell by 340 tons.  The selloff in gold ETF in such size reflected overall institutional investors pulling money out of gold. 

The British Pound recovered from March dip and rebounded to USD 1.545 for a pound on 26 April.  A touch above its 50 days moving average and completed a technical rebound.  Let’s consider that factors that could affect GBP/USD movement.  British economy is and will continue to be at a weaker state of health than US.  The UK financial sector is at best not getting more sick.  Euro zone is still a burden, not a gift.  There is one aspect where UK could par with US.  Both US and UK governments are likely to print more money.  Recently, we see a fair amount of media coverage on debt to GDP ratio.  In short, some very clever people said it is bad for a country to borrow too much money versus its economy and the measurement is the debt to GDP ratio.  Some leaders religiously believe this argument and stand firm about austerity measures.  There is another camp of very smart people and they said high ratio of debt versus GDP (say more than 90%) could be managed and question whether austerity is a solution to Euro crisis.  The world has gone around the sun 5 times since financial crisis and the Euro zone is held together by shoe strings.  Austerity measures are definitely not a quick fix and the patient is still dying.  People are now worried if the patients could survive long enough for austerity to work.  What is the point to take a drug that gives the patient so many side effects that would kill the patients before it could cure?  Come back to GBP USD.  The weakening of the School of Austerity means more capacity in money printing.  The US government is still printing dollars faster than it could pay debt while the two political parties bargain over details such as tax and healthcare policy.  The UK government will have a new banker Carney in town on 1 July.  Will he use an axe or scalpel to tackle recession? If he follows Abe-nomics, the pound could be happily sliding.

FTSE 100 Index which reflects the UK stock market, spent April yoyo-ing between 6200 and 6500.  Similar to US market holding on to a relative high level historically.  Going forward, FTSE 100 could be benefited from a weaker GBP and further rally in US stock market.  Most of the companies in FTSE 100 index are global companies like SABMiller, Rio Tinto, Vodafone and BP.  They will react more to global economy than to UK domestic economy.  So don’t get fooled by the depressing local news.