Commentators around the world are beginning to turn less pessimistic on the global economy, and as Ben Bernanke decreed that dollar devaluation is not US policy, the gold price took a serious knock last week. But, the decline halted above the critical $850 mark and underlying strength seems to have appeared at around the $880 level, as the beginnings of another upward creep seem to be in progress.
Traditionally late spring/early summer can prove to be a weak time for the gold price as US traders and bankers' thoughts turn to summer holidays in the Hamptons, Caribbean and further afield, and some European centres seem to virtually shut down for a full month or more, so it would be unwise to bank on any major price movements until late August or beyond - if then. But the overall fundamentals for a price increase are still present and many analysts, even conservative ones, are looking for the $1,000 an ounce level to be breached again later in the year.
There have been two important conferences in London in the past couple of weeks attended by some of the world's leading thinkers and analysts on gold and gold stocks. The first was the FT's one day gold conference and the second the two day World Mining Investment Conference. In general the consensus at both these events was that the gold price could be due for another upwards run later in the year, although many of the speakers were perhaps more inclined to the bullish viewpoint due to their own involvements with gold mining companies and specialist gold investment vehicles and funds.
As an example, the well respected John Hathaway, portfolio manager of the U.S. Tocqueville gold fund, speaking at the latter event, reckoned that gold was likely to be a good investment and gold stocks an even better one. As a gold fund manager he was, to an extent, talking up his own book, but he has a good track record and his views should definitely be taken seriously as there is good research behind them.
Hathaway put forward a number of arguments supporting his thesis on gold and gold stocks. He pointed out that gold is historically cheap relative to the oil price, and also relative to global financial assets. It has also not risen as far as many other commodities have in the latest commodity boom. Gold is also a good buy in terms of real interest rates, which are currently negative, and falling further. Positive interest rates tend to mitigate against gold holdings as gold does not generate interest, but with real growth in the gold price over the past three to four years it has more than countered this disadvantage.
He also pointed out that holding gold mining company shares, as long as they are carefully selected, is, in reality, a long-term option on gold, giving a better exposure to the metal over a longer timeline, and at a lower strike cost, than say a five-year gold call written on a bullion bank. Gold is also an excellent portfolio diversifier, balancing out some other general portfolio risks.
In terms of gold supply, he pointed also to the relative decline in the numbers of plus million ounce gold discoveries over the past 30 years. What's more many of those being found could be considered to be in areas of higher political risk, while rising costs and declines in output from older mines, along with factors like power shortages, are all affecting world output levels which may well decline even further this year.
Hathaway concluded by noting that gold shares can be viewed as a very long term option on the gold price and that they are trading near historic lows compared to the gold price itself.
Obviously there are other factors at work here. One needs to do far more due diligence when purchasing gold stocks - not helped by the promotional utterances of some explorers and producers. But there are many excellent gold mining companies out there which will generate great returns in a rising gold price scenario.
But coming back to the gold market in general, my colleague Rhona O'Connell's report that analysis of gold performance during previous recessionary periods suggests that there is no link at all between recessions and the gold price - see What does a US recession imply for the gold price? - so it is other factors which have been the main price drivers of late, notably the oil price, the declining dollar and perhaps the credit crunch, but also the falling worldwide gold production and the huge investment-related offtake by gold ETFs. The market is also sentiment-driven, as is the main commercial usage sector - gold jewellery. If the market, and the jewellery sector, both perceive that the price is likely to rise, then it surely will. If sentiment turns against gold, it will struggle, much as it has been recently.
Emerging economies - particularly those which have a penchant for gold purchases as a wealth store and inflation and political risk counter - are growing rapidly and the development of middle classes with more purchasing power would seem likely to underpin the market going forward. The two biggest of these are, of course, India and China. The former has been a huge domestic consumer of the metal, while China perhaps less so, but the psyche of the Chinese suggests that in the relatively near future, growth in gold purchases there will overhaul that of all other nations.
In the meantime gold may well continue to struggle through a sticky period - but it may not take much to jerk it out of a hiatus period and, as usual in investment, timing is everything.
Does the current price represent a good buying opportunity? Probably yes given that gold keeps clawing its way back from temporary setbacks. But it does tend to be relatively unpredictable in the very short term. For the long haul, and as mentioned above as a portfolio diversifier it would certainly seem to have its merits.