The latest Gold Investment Digest from the World Gold Council (WGC) carries some interesting facts and comments on the state of global markets and draws the conclusion that continuing investment in gold will remain an important aspect of portfolio investment.
Ongoing risk aversion, growing uncertainty over where consumer prices are headed and a renewed vigour in the search for effective portfolio diversifiers all supported gold investment demand throughout the first quarter of 2009, according to the WGC.
One reason the financial crisis has been so devastating for investors is that many alternative assets did not deliver on the promise that they would provide portfolio diversification, said Natalie Dempster, Head of Investment, North America for World Gold Council and author of GID. The same cannot be said for gold. Gold has been one of the few assets that has genuinely provided investors with diversification throughout the financial crisis.
For the first quarter of 2009, the gold price ended at US$916.50/oz representing a moderate increase of 4% against a 12% decline in US stock prices during the period.
While gold seems to have wavered a little since the end of the quarter, ETF investment remains at an extremely high level, even if marginally off the very recent record. Overall, inflows into gold ETFs continued to grow throughout the quarter, with investors buying a record 469 tonnes of gold, dwarfing the previous quarterly record of 145 tonnes, set in the third quarter of last year. This took the total amount of gold in ETFs to 1,658 tonnes, worth US$48.6 billion. What may be surprising given this level of investment demand is the relatively static performance of the gold price itself, but much of this is down to the virtual collapse of jewellery demand, particularly in high volume purchasing countries like India. There is some evidence that buyers are entering the market again, but there remains a danger of continuing gold scrap sales boosting supply in a number of countries around the world. But this tends to be a relatively short term phenomenon and should begin to fall away.
While the size of ETF gold holdings could be seen as a dangerous overhang for the gold investor should sentiment turn against gold, there seems little sign of this happening as yet.
The WGC also notes that anecdotal reports from coin and bar dealers also point to another very strong quarter in retail demand for coins and bars in Q1 09, after a 396% year-on-year increase in Q4 08. Dealers have continued to report shortages in the availability of official coins and small bars.
During the quarter, the WGC notes, average gold price volatility softened to 29.2%, on a 22-day rolling basis, in Q1 09, from 44.8% in the final quarter of last year. Having eased slightly over the quarter, the volatility still remained well above gold's long-run price volatility of around 13%. Continued uncertainty over the health of the world's financial sector and broader economy, alongside aggressive monetary and fiscal policy moves from the world's leading central banks and major governments kept market volatility high across the board. For example, the volatility of the S&P500, also measured on a 22-day rolling basis, ended Q1 09 at 49%.
Regarding the broader economic backdrop, commentators expressed two distinct views with respect to where consumer prices are headed. One sees inflation coming, as a consequence of the staggering increase in public spending and the quantitative easing measures being put in place by central banks around the globe. The other view argues that deflation is the more likely prospect, pointing to recent inflation figures - US consumer prices were unchanged on an annual basis in January for the first time since 1954 - and the continued deterioration in consumer confidence and spending. Both scenarios have possible positive implications for gold. What we may see of course, is in effect a combination of the two scenarios with an initial deflation in the short to medium term being replaced by significant inflation longer term.
Gold is not just effective during a financial crisis. The unique and diverse drivers of gold demand and supply mean that changes in the gold price do not correlate with changes in the prices of other financial assets, regardless of the health of the financial sector or broader economy, Dempster said. Gold is an effective portfolio diversifier regardless of the stage of the economic cycle.