24th November 2010
In addition to the ongoing extreme economic problems worldwide, in recent days exemplified by the crisis in Ireland, gold has found support from the declining value of the dollar.
As a result central banks and hedge funds have diversified away from the greenback, seeking shelter instead hard assets, particularly gold. It is one of the major reasons for gold having had such a great ride this year.
There is plenty of evidence showing that gold and, in general, precious metals and commodities are an effective "event' hedge, a good bet in times of strife.
As Christopher Wyke, emerging markets and commodities product manager at Schroders illustrated last week at a conference in London, gold and precious metals were the only classes that provided positive returns during S&P 500's very worst months over the ten year period December 1999 and December 2009. Commodities, while not quite in positive territory, were the next ‘best performer'.
Another interesting metric highlighted by Wyke is that in terms of the average monthly return during the 10 worst falls in the S&P between December 1998 and August 2009, gold also proved to be a positive insurance compared say to the S&P 500 and the FTSE 100.
As for commodities as a class in its own right and in relation to inflation, Wyke notes that it is the best performer by far in terms of annual returns versus stocks and bonds in a rising inflation environment (19.6% versus 2.1% for stocks and 6.1% for bonds).
Under stable inflation conditions commodities (10%) still top stocks (6.85%) and bonds (6.8%). Where commodities falter badly though is in an environment of falling inflation, with stocks and bonds returning 18.3% and 13.5% respectively but commodities experiencing negative returns of 10%.
Wyke, speaking at Schroders International Media Conference 2010, also highlighted an interesting correlation between gold and real US short-term interest rates, with the gold price in general travelling in opposite direction to rates, appreciating in a low rate environment but falling in times of high rates.
Another important factor supporting the gold price though is supply constraints: the gold industry's exploration expenditure globally has increased dramatically in the last few years as it has become harder and harder to secure major discoveries.
At the same time, the output of gold by the top four producers globally declined steadily between 1997 and 2007.
As for when to invest in gold, technical analysis by Wyke of gold spot and gold equity movements over the periods 1968-2008 and 1984-2008 respectively suggests that, historically, the best time of the year to buy gold and gold stocks has been the third quarter.
Finally, rather mouth-wateringly for investors, Wyke points out that the big gold bull run of the 1970s ended after a 2300% rise.
The current gold bull market has seen price rise to date of approximately 260%.
That, of course, is not to suggest that the current gold run will match that of the 70s but it does show that there are historical precedents for an extended and sustained appreciation.
Wyke's generally positive outlook for gold is echoed by others who feel that despite near-term headwinds, the upward trajectory of the gold price remains firmly intact.
In recent days, a number of investment banks raised their price forecasts for the yellow metal. For instance, as reported here by Gold Alert, CIBC World Markets raised its 2011 and 2012 gold price targets to $1,600 and $1,700 per ounce.
Some analysts even believe it could hit $2,000 per ounce next year, as pointed out here by Money Morning.
Indeed the role of gold, which on November 9 touched an all time high of $1,424 an ounce as the market reacted to the Fed's $600 billion quantitative easing (QE2) injection into the US banking system, could become even more central to the operation of the world economy if World Bank president Robert Zoellick's recent surprise call for including gold in a new currency based on a basket of dollars, euros, yen and yuan is heeded.
SEE ALSO: Is gold a bubble waiting to burst?