Is gold now the contrarian play?
The $100 fall in gold prices at the end of February rattled many investors but, are we now moving too quickly to the other side of the investment spectrum?
Posted: Friday , 16 Mar 2012
GRONINGEN (Mineweb) -
Going on holiday for three weeks without one's laptop is a slightly terrifying experience. But, one that comes with unexpected benefits. Not only does my skin no longer have the translucent glow of a Star Trek villain but, I also have a less cluttered view of the gold market.
It is easy to get lost in the minute-by-minute movements of the gold price, and the never-ending cyclical search for reasons why the yellow metal moved up or down in a given session.
A look at the headlines of some of the stories posted on Mineweb at the end of February show that many of the commentators we were talking to were fairly confident of a continued solid run for the yellow metal.
"Gold and silver to continue rising as fed's Wall Street puppets cornered"; " read one while another said "New all-time highs for gold may only be days away".
The consistently bullish folk at Sprott were quoted saying "Every segment of the gold stock market is very cheap today - Sprott Asset Management", while another claimed that "Now is the time to buy gold and silver as QE goes into overdrive."
That said, there were a few warning signs, albeit fairly optimistic sounding ones, such as " Supercycle in gold to continue this year, but price crash seen ahead"
This sentiment, however, was pulled down sharply, along with the price of the yellow metal, on the first of March when Ben Bernanke and the Federal Reserve gave no indication that a further round of Quantitative easing was on the cards.
At one point during the day, gold fell almost $100. Mineweb's Lawrence Williams pointed out that while the fall seemed overdone, "computerised automatic trading can have that kind of effect."
Adding, " despite all the attention being given to the latest falls in the precious metals prices, year to date the gold price is actually still up 9% and silver a massive 23.5%. An impressive performance by any standards."
Since then, headlines about the future of the gold price have been somewhat more muted in tone, although there are still many commentators who believe Gold and silver will go much higher over next 2-3 years, there are just as many making the point that the "even though there is no bubble in gold, the correction may not be over yet " and "Gold's plunge below 200-day moving average, a bearish signal"
A $100 fall in price is large enough to rattle even the least emotional investor but, many of the fundamentals underpinning the gold price haven't really changed. Europe, even with a new debt deal for Greece is still in a fair bit of trouble. The US deficit hasn't gone away and neither have concerns about Iran.
So, what has changed?
For many of the more speculative holders of gold, the fall at the beginning of March may have been a rather strong reminder of the old adage: no one lost money taking a profit.
If Bernanke and other central bankers are to believed, the world has somehow managed to claw its way back from the brink and many investors really want to believe this is the case.
If one believes that this is indeed the case, then a move out of gold makes sense. As growth returns, there are likely to be other assets that perform better.
This is especially true if one considers the sheer weight of investment demand that has driven the metal's price over the last few years.
If this demand were to suddenly dry up (something that is no longer inconceivable, if one believes that the world is returning to growth) it is worth worrying about whether or not other sources of demand, like jewellery, would be able to pick up the slack.
As UBS's Edel Tully pointed out yesterday, " physical demand did respond to gold's move lower: demand from India was the strongest since January last year. But interest from other regions was very limited. Very simply, the physical community is not stepping up in enough size to prevent further downside. This is certainly a worry for gold. The risk now is whether the ETF community - a net buyer of 2.05 moz so far this year - distances itself from gold as well."
Dylan Grice, in his latest Popular delusions note for Societe Generale, makes the point that " Some would say the time to sell is now. Gold just isn't the misunderstood, widely shunned asset it was a few years ago. Isn't the gold bull market now long in the tooth, with better opportunities to be found elsewhere?"
Following this logic, and remembering the old adage, that no one lost money taking a profit, now could well be the right time to get out of gold.
But, this is predicated on a belief that the world is on the mend, that the financial system as we know it is still fundamentally sound.
And, here is where we run into problems once again. As mentioned earlier in the piece, many of the fundamental reasons gold rose in the first place remain.
As Grice writes, "The reason I own gold is because I'm worried about the long-term solvency of developed market governments."
The Fed's latest pronouncements about the lack of a need for a new round of quantitative easing may be a bullish signal from a short term growth point of view but, it doesn't solve the underlying problem - that the US and, by extension , the Western world cannot go on living beyond its means in perpetuity.
The problem is that the truth of that statement isn't a particularly attractive one politically, which is why most politicians are happy to make it someone else's problem.
For Grice, eventually politicians will make the hard choice of short-term pain for long-term gain because there will be just no other choices left. When this happens, he says, that will be the time to sell gold.
Until then, by implication, it is probably worth having some insurance - just in case.