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There is a study published by the Credit Suisse and the London Business School that says that gold prices have been too volatile to play a reliable role as a hedge against inflation over the past 112 years.
While inflation does not reduce gold's real value, it has no yield or income flow and the precious metal has given a far lower long-term return than equities in the period since 1900, or 120 years, says the study. Generally, the analysis is conducted based on periods when gold was money and where it was not and we believe that these two should not be mixed.
We realize that gold does not give income or interest. People invest in gold is a search for yield through capital appreciation or as a safe haven – or as money. When interest rates are close to zero or negative in real terms, gold begins to glimmer. The US, Europe, the UK, China, India, gold’s biggest markets, all have negative real interest rates. It is true that the past 112 years have not all been good for the yellow metal. Yes, there are bull markets and there are bear markets and we are in the midst of a bull market in gold right now.
In the period since 1900, gold gave a real return of 1.1 percent in sterling terms and its value fluctuated widely, said the study. "Gold is the only asset that does not have its real value reduced by inflation. It has a potential role in the portfolio of a risk-averse investor concerned about inflation," it said. "However, this asset does not provide an income flow and has generated low real returns over the long term. Gold can fail to provide a positive real return over extended periods."
True. That’s why we are invested now, while gold is in the midst of a bull market. When it swings into a bear market we’ll consider other options or perhaps evaluate the profitability and risk of trading the downswing – impossible to tell at that point. However, the key issue is that one does not have to be fully invested in the precious metals sector during bear markets – what is the assumption of the study.
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The Sunshine Profits Team extends our best Valentine’s Day wishes. To see if you’ll fall in love with the precious metals sector again, let's begin the technical part with the analysis of the yellow metal. We will start with the very long-term chart (charts courtesy by http://stockcharts.com.)
We begin with the chart of gold from a non-USD perspective. Last week there was a weak consolidation from a non-USD perspective and the strong similarities to the trading patterns of mid-2011 are no longer in place. With these developments, it is unlikely that a move to the upside will be as sharp this time. We have seen two consolidations this time and last year there was only one small stop, after which gold’s price immediately shot upward. This chart suggests that a sharp rally is not a likely probability and that further consolidation is quite possible at this time.
In the long-term chart of gold from the perspective of the Japanese yen, we see that the RSI level over 60 and this suggests that the local top may be in or is at least close. In the past, when the RSI held close to the 70 level for some time, local tops have been seen. Such is the case today. Prices are also close to the middle of the trading range but not at it, so a pause appears likely though not yet imminent.
So, will gold decline from here? Most likely yes, but not very far. The additional confirmation of the short-term bearish case comes from the general stock market, as gold has been recently moving in tune with stocks. Consequently a turnaround in stocks could ignite a move lower in gold as well.
