Newstalk interviewed GoldCore’s Mark O’Byrne this morning about the investment asset that is not well understood – gold. The interview began with Nick Bullman of Newstalk asking Mark to explain the poor performance of gold in recent years as it has underperformed since 2008.
Click here to listen
Gold prices rose every single year from 2000 to 2013 responded O’Byrne.
It had “massively outperformed” due to many risks and on the expectation of major financial crisis and had as such had priced in the financial crisis of 2008 and protected investors during and after the crisis.
Mark said that it was a matter of a classic bull market which frequently see “two steps forward and one step back” and lengthy periods of correction and consolidation.
Gold in US Dollars – January 2007 to February 2015 (Thomson Reuters)
He pointed out that Goldcore had warned in 2013 that a sharp correction might be due as is normal in all bull markets. He referred to the severe retracement of the gold bull market of the 1970s where gold prices fell over 50% between 1975-76 before rising a further 800% in less than 4 years.
Similar price performance could be seen in the coming years.
Gold had not performed very well in recent years but he believes that the unfolding crisis in the Eurozone and the very uncertain economic picture globally would likely lead to higher gold prices in the coming years.
He explained that the cost of mining one ounce of gold was, on average globally, $1,200 per ounce and that prices therefore could not fall below that level for any extended period of time He acknowledged that lower oil prices may bring costs of production down to some extent but that the cost of protection should stay above $1,000 per ounce.
At the same time the current low prices relative to costs of production had caused some mining companies to fold or postpone production which will lead to tighter supply in the future.
When asked why one should buy gold in a strong dollar environment and with deflation taking hold around the world he said that gold acts as a hedge against dollar and all paper currency devaluations.
Monetary policy across that world is still incredibly loose with interest rates near 0% and with the EU about to begin its QE money printing program or “experiment”. He used the example of Russia whose gold owners have been very well protected during that country’s recent painful economic and currency crisis.
He referred to recent academic research and the views of asset allocation experts like Ibbotson and Mercer who have shown gold is a classic “hedging instrument.”
He said that gold’s ideal conditions are not those of deflation but that the degree of uncertainty in the world today was a compelling reason to own gold. Gold does in well in deflation as gold cannot go bust – “that’s why central banks are the biggest buyers of gold today.”
The interviewer questioned gold’s hedge status referring to the brief fall in the gold price during the 2008 crisis, suggesting that investors used liquidity in gold to cover their losses.
Mark responded by clarifying that it was not gold investors selling physical gold but speculators and hedge funds who deal in futures contracts liquidating all positions en masse.
The paper price of gold fell in the very short term after the Lehman crisis but within weeks prices had recovered and closed the year higher – from $838 at the start of 2008 to close the year at $872 per ounce for an annual gain of 4 per cent.
Gold in US Dollars – Full Year 2008 (Thomson Reuters)
Other assets were sharply lower in 2008 and so in a deflationary environment, gold outperformed and that outperformance continued in 2009, 2010, 2011 and 2012 prior to a sharp fall in 2013 (see chart above).
He added that gold had already anticipated and begun to price in the crisis. He clarified that gold is not an “absolute hedge” and that no such thing exists, but in the medium to long term gold always serves it’s purpose as essential financial insurance and a vital safe haven asset.The short Newstalk interview can be listened to here (From 7th minute to 15 minute, 20 seconds)
MARKET UPDATE
Today’s AM fix was USD 1,206.50, EUR 1,059.36 and GBP 781.77 per ounce.
Yesterday’s AM fix was USD 1,221.75, EUR 1,072.56 and GBP 793.86 per ounce.
Gold fell 1.63 percent or $20.00 and closed at $1,208.50 an ounce yesterday, while silver slid 4.51 percent or $0.78 closing at $16.51 an ounce.
Gold in US Dollars – 2015 Year To Date (Thomson Reuters)
Gold fell to a six week low in the prior session to $1,203.80 after opening at $1,231.30 as some speculators closed out positions ahead of the week long Lunar New Year holiday that began today in China.
Gold in London continued to fall but remained above the $1,200 level.
Spot gold was down 0.1 percent at $1,207.21 an ounce in early London trading and Comex U.S. gold futures for April delivery were down $1.20 an ounce at $1,207.40. Spot prices hit their lowest since early January on Tuesday at $1,203.30.
Silver was down 0.5 percent at $16.48 an ounce. Spot platinum was unchanged at $1,170.95 an ounce, close to the previous session’s 5 and a 1/2 year low, while spot palladium was flat at $779.05 an ounce.
Today the U.S. Fed releases its minutes from their policy meeting from January 27-28th at 1800 GMT. The U.S. dollar rose 0.2 percent against the euro on Wednesday ahead of the U.S. Fed minutes release.
The British pound is close to a seven year high versus the euro after it was reported that UK unemployment figures dropped and earnings rose. The Bank of England commented that it sees inflation climbing “fairly sharply” as the effects of cheaper oil prices fade.
Greece’s government confirmed it would ask for a six month extension to its loan agreement with the euro zone, which it rightfully distinguishes from its ‘bailout’ programme.
Greek Prime Minister Alexis Tsipras told Germany’s Stern magazine an economic war with Russia was in no-one’s interests and that imposing sanctions on Moscow over the crisis in Ukraine was “hypocritical”.
“If you want to punish Russia, you need to punish all the countries where Russian multi-billionaires have invested their assets,” he told Stern in an interview released today.
Currency wars continue as nations continue to seek competitive advantage by devaluing their currencies through QE and now negative real interest rates.
Last week, Sweden’s Riksbank slashed its main policy rate to negative. It thus became the 14th central bank to ease monetary policy so far this year, but the first to actually take its “repo rate” below zero to -0.1 per cent.
Incredibly and some would say insanely, this means that Sweden is now charging its banks to lend money. In Britain, the same interest rate currently stands at a historic low of 0.5 per cent, but could well be cut further according to Mark Carney.
Switzerland and Denmark have already sent their deposit rates into negative territory – to -0.75 per percent to prevent currency appreciation.
All of this is extremely bullish for gold and silver. Prudent buyers will use weakness to accumulate physical bullion.
