GOLD ANALYSIS

Growing trust in gold makes it the perfect place to hide

In this swirl of economic turmoil, Erste Group gold analyst, Ronald Stoeferle, believes that gold is a good place to hide

Author: Geoff Candy
Posted: Wednesday , 16 Nov 2011

GRONINGEN - 

A loss of faith in the political system and the currencies that underpin it has been growing over the past few months. Its most visible manifestation is the "Occupy movement that has moved from Wall Street all over the world.

Its second most visible manifestation, some would argue, is the price of gold and the throngs of investors that are buying the yellow metal in all shapes and forms.

Speaking to Mineweb.com's Gold Weekly podcast, Erste Group gold analyst, Ronald Stoeferle says that in recent months there has been a distinct shift in investor attitudes and a growth in fear.

"Where before at the end of presentations I was asked whether or not gold was in a bubble and what my long term price targets are, no I am increasingly asked for my views on gold confiscation and what the chances are like for further riots in the streets," he said.

"The monetary aspect of gold is getting more and more important. People don't want to make big money, they just want to preserve their purchasing power and their wealth."

Stoeferle adds that gold has once more become politically correct. The yellow metal has been money for last 5,000 years he says, except for a short interruption of about 40 years, since 1971.

"We've seen this year that gold is accepted as collateral by JP Morgan and ICE and many other players... we've seen a lot of comments by high profile personalities talking in a positive way about gold and that's the thing that we haven't seen in the last probably two or three decades."

Talking of high profile pundits of the yellow metal, Stoeferle said of the recent news of hedge fund manager John Paulson's sale of a third of his gold ETF holdings, " There are a lot of rumours that he just sold his gold ETFs and [instead] went into physical, allocated gold. In the same way as, I think, the endowment fund of the University of Texas did.  That's also a kind of sign of the times, people kind of lose trust in paper gold and want to hold physical gold - allocated gold."

But, he says, what people do need to consider is the ratio of stocks to flows when it comes to gold. While many commentators say that gold cannot fall below $1,000 an ounce because that is roughly the breakeven cost to pull an ounce of the metal out of the ground, what is forgotten is the volume of the above ground stock of gold world wide.

"The aggregate volume of all the gold ever produced is about 170,000 tonnes - that's the stock - the annual production for 2010 was 2,586 tonnes.  That means we've got a stock to flow ratio of 65 years and this means paradoxically that gold is not scarce.  Quite the opposite is the case - it's one of the most widely dispersed goods in the world."

Because the level of annual production is so low and has been for some time, gold is considered precious and this feature has been acquired in the course of centuries and cannot be undone any more.

"Global gold reserves grow by an annual 1.5% and thus at a much slower rate than all the other monetary aggregates around the globe.  Its vaguely in line with the population growth and this kind of explains why traditional supply-demand models do not really work for the gold market."

That said, Stoeferle is currently looking for gold to break $2,000 and, before the end of the bull market to at least break through its inflation-adjusted all time high of $2,300.

"In this environment of negative real interest rates all over the world you have risk of financial armageddon and a loss of trust in fiat currencies.  I think you just want to hold a big chunk of your portfolio in physical gold or physical silver."

He adds, "In general, gold is probably the most conservative and perhaps boring investment that you can have, but in this kind of environment it's just the perfect place to hide."

 

iPad Version: Gold and silver bars are pictured in front of a safe door at the Austrian Gold and Silver Separating Plant 'Oegussa' : Lisi Niesner / Reuters