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Even the bulls are turning bearish on gold
prices. Or rather,
they'd like to.
"Everything's beginning to look as if it's turning the corner, we've
passed the point of maximum despair," reckons Nick Moore, head of
commodity research at state-owned Royal Bank of Scotland in London. He cut
the bank's bullish 2012 forecasts for all precious metals except gold back
in January.
But now, "A number of things which would have kept people with an
eye on the upside for gold have now been neutralized." And despair over, gold must be fated to sink, right? Not quite.
"Gold can now settle back," Moore tells Bloomberg, plumping a
cushion and fetching a foot-stool.
Over at Mineweb, "Is gold now the
contrarian play?" asks Geoff Candy,
pretty much answering his own question by asking it, and also noting
that analysts pointing to "warning signs" can only find
"fairly optimistic" ones for gold
prices.
"The one danger with gold is
that the bullish consensus on gold is now higher than it's been at any time
for the last two or three decades," says former base-metal trader (and Eurocrat nemesis) Nigel Farage,
speaking to Eric King. Markets do whatever it takes the screw the
most people the most, of course. But while "there is a danger that the
short-term speculative market finds itself a bit long of gold," says Farage, the outcome really isn't that bad.
"You can't discount – when a market is shaped that way –
that it could have a dip."
Jeez, let's fetch it a towel and a bathrobe! Won't anyone call gold's
bull market dead?
"Ten years ago gold was not owned by retail investors but was
primarily held by central banks," says UK asset manager Armstrong Investment, overlooking the world's biggest holders both
then and now – Indian households. "Strong performance,
uncorrelated returns with other asset classes and the advent of
easily-accessible ETFs
have seen investors make ever-increasing allocations to the precious
metal." SocGen strategist Dylan Grice agrees,
also noting that "Gold just isn't the misunderstood, widely shunned
asset it was a few years ago. Isn't the gold bull market now long in the
tooth, with better opportunities to be found elsewhere?"
But again, both analyses find more cause to stay long of gold than sell
it, let alone short it. Grice because the real crisis – the final
calamity awaiting Western state finances – still awaits.
Armstrong because "an allocation to gold [still] makes sense in a
diversified portfolio."
Still, "Investors should not view [gold] as a safe haven without its
own inherent risks." Most notably because its correlation with equities
– the way it moves in (or out) of line with stock markets – has
risen to what seems a high level since risk assets bottomed in early 2009.
"Over the long term,"
says Armstrong, "gold has been a perfect portfolio diversifier –
positive returns with no correlation to traditional asset classes. [But] over
the past three years gold
prices have shown a
correlation of 0.8 with the S&P500."
Now, gold and the US stock market would show a correlation of +1.0 if
they moved in lock-step together. They'd show a perfectly negative
correlation of –1.0 if they moved in precisely opposition. So the three-year
reading of +0.8 does indeed suggest gold has lost a good chunk of its
risk-spreading power, moving higher as stocks have also moved up and
threatening a sharp drop if equities now lose their mojo.
Look again at the chart, however. Because this strong correlation is
hardly unknown. And while the current three-year correlation of +0.8 has been
maintained for seven months so far, it was achieved (and breached) for 33
months in 2005-2008...nine months in 1987...and 11 months back in 1980.
What really matters is the huge swings in between. See, all told, and
since gold
prices began to move freely in the late 1960s,
gold has moved in the same direction as stocks – on a quarterly basis
– for pretty much half the time. It's gone the other way for pretty
much the other half, leaving gold a great diversifier overall. Neither
positive nor negative. Just unrelated.
Or as a statistician would put it, the rolling 12-month correlation
between Dollar gold and the S&P 500 index has been 0.04. That's as good
as zero. There's really very little link between gold and equities long term.
And what link there is comes through, say, a strong correlation today, and
then strongly inverse correlation tomorrow. Net-net the result comes out at
sweet nothing. Provided you buy and hold for the long run, rather than daring
to time a move in (or out) on where the latest correlation now stands. Or
where you judge the rest of the world to be, relative to the 11-year bull
market in gold
prices.
Looking to start or add to your gold
bullion holdings today...?
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