Clif Droke: Gold, the Investor Safe Haven du Jour
Source: Clif Droke for The Gold Report (6/17/11)
Throughout the duration of the 2008-2009 credit storm and the recovery that followed in 2010-2011, gold's performance relative to other asset classes has been superior. In this Gold Report exclusive, Gold & Silver Stock Report Editor Clif Droke charts gold's past and possible future.
The yellow metal has maintained its relative price strength during the most recent financial market correction, and gold is now closer to its all-time high than most stock market indices. As an illustration of gold's leadership, note the following chart. At no time in the last four years has the performance of the benchmark S&P 500 Index (SPX) outstripped that of gold. The following chart compares the relative percentage performance of the SPX versus the iShares Gold Trust (GLD), a popular and heavily traded gold ETF that tracks the gold price.
As you can see, gold has dramatically outstripped the stock market in terms of relative percentage gains over the last three years since the U.S. economy went into recession. Gold has been the major beneficiary of safe haven funds, as investors rushed to buy gold as a defensive investment. What many analysts are wondering, though, is how much of the gold bull market of recent years is due to safe haven-investment flows and how much is due to other factors, such as industrial and jewelry demand.
A Gold Demand Trends report released on May 19 by the World Gold Council (WGC) suggested that much of gold's gains in the first quarter of 2011 were driven by growing demand from China and India. Analysts have pointed out that the increasing prosperity of those two countries has made it easier for its citizens to purchase gold bullion, in coin and other forms, but primarily as jewelry, which in India serves the dual role of decoration and personal investment.
The WGC report estimated that Indian households own more than 18,000 tons (18 Kt.) gold, making the country the world's biggest holder of gold. By comparison, official gold reserves in the United States total about 8,100 tons. Commenting on these statistics, BusinessWeek magazine wrote: Indian consumers aren't done buying: In this year's first quarter, they purchased an additional 206 tons of gold jewelry and 85 tons of gold bars and coins. And China's appetite is growing rapidly and could soon overtake India's.
BusinessWeek found that if Chinese and Indian demand is stripped away, the rest of the world's hunger for gold isn't nearly so vibrant. Some new buyers have shown up; some prior speculators are cashing out. But a global flight to gold as a hedge against Armageddon doesn't appear to be taking shape.
There is reason to believe, however, that this conclusion is mistaken. To begin with, jewelry demand doesn't account for the bulk of the tremendous run-up in gold's price over the last few years. Gold's strong performance can be linked primarily to the following four classes of buyers:
- Individual investors
- Central banks
- Hedge funds
- ETF holdings
Individual investors in Western countries bought gold as a safe haven investment in the aftermath of the 2008 credit crisis, for obvious reasons. Fear was very high in 2009 and 2010, and demand for gold and silver bullion coins in many categories hit record levels. The extraordinary increase in gold's cost-per-ounce may have pushed many marginal players out of the market in the last year or two, but that demand was easily supplanted by institutions and hedge funds. Indeed, the appetite for gold displayed by these big money investors has been an oft-overlooked factor in gold's upside run since 2009, just as it was in the years preceding the 2008 financial collapse.
Gold Fields Mineral Services (GFMS) recently published the 44th edition of its annual survey of the world gold market, Gold Survey 2011. According to GFMS, gold investment demand last year continued to drive the gold price higher; it rose nearly 26% in 2010 on an annual-average basis. GFMS noted that global gold investment in 2010 was the second highest on record, while world gold investment set a new high last year, in value terms. ETF holdings, notably, experienced the second highest annual gain in 2010 according to GFMS.
In more recent times, added to the list of key drivers behind the metal is a fifth major player-academic institutions-which have been increasingly looked to the yellow metal as a long-term investment. It was reported in April that the University of Texas Investment Management Co., which also handles Texas A&M, had 5% of its $19.9-billion endowment in physical gold bullion. The endowment took delivery of 6,643 bars of gold (664,300 oz.) in what is widely regarded as an extremely unusual move for a typically conservative university endowment.
This may not be the flight to gold as a hedge against Armageddon that BusinesWeek talked about, but it makes you wonder what exactly the folks at Texas Investment Management Co. are so concerned about that they would take delivery of physical gold. Perhaps, they know something the rest of us don't.
If not Armageddon, what reason(s) could there be for owning gold in the years ahead? When it comes to evaluating gold's long-term prospects, two factors must be considered. Within the typical lifespan of an investor, there are two major periods to buy gold. The first is in the face of hyperinflation, due to its proven performance as the ultimate hedge against an erosion of purchasing power. For example, in the hyperinflation that began in the late 1960s and lasted until about 1980, gold went from $35/oz. to around $800/oz.-proving its utility as an inflation hedge.
The second time to buy gold for the long term is in the face of economic collapse or financial market volatility, as gold has a proven record as the ultimate storehouse of value. For instance, after peaking in 1980 when hyperinflation ended and disinflation began, gold bottomed in 1999 at about $250/oz. at the beginning of economic winter. It has been going up since then, notwithstanding temporary setbacks. If history repeats, gold should begin to accelerate when economic collapse comes to bear, as we approach the fateful year 2014, when the 60-year long-wave, or Kondratiev wave, cycle is scheduled to bottom.
As Cycle Analyst Samuel J. Kress has observed, any portion of the similar increase from 1966-1981 bodes for astronomic prices in gold from here. In recent decades, the buy-and-hold mentality for conventional equities worked until revolutionary changes at the turn of the century retired this strategy along with the buggy whip. Consequently, he said, replacing that gold will be the contemporary equivalent [of equities] and investors should retain long-term positions in gold and add to positions on interim corrections.
Regardless of whether the economic-Armageddon scenario comes to fruition, there are several reasons gold will maintain its long-term bull market, which began at the turn of this century. If you believe the government will continue debasing the U.S. dollar, the gold price will benefit from this debasement policy. If, on the other hand, you believe the economic, Kondratiev winter of the 60-year cycle will accelerate in the next few years, history has proven conclusively that gold should once again be the safe haven du jour for investors seeking asset protection. Armageddon or not, gold's long-term prospects are still promising.
Clif Droke is the editor of Gold & Silver Stock Report, published each Tuesday and Thursday. He is also the author of numerous books, including most recently, Gold & Gold Stock Trading Simplified. For more information, visit www.clifdroke.com.
Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.
Streetwise - The Gold Report is Copyright © 2011 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.
101 Second St., Suite 110
Petaluma, CA 94952
Tel.: (707) 282-5593
Fax: (707) 282-5592