Gold’s dramatic nose dive the other week – the biggest since June 2006 – did nothing to dissuade punters from their prediction that the market value of the volatile, precious metal is on an upward trajectory and will continue to rise…and rise. Some believe soaring to an outrageous $US3000 an ounce.
Commodity Warrants Australia’s (CWA) managing director, Peter McGuire believes that by 2020 it is quite conceivable that gold will hit $US2000 to $US2500 an ounce.
Historically the gold market runs counter-cyclical to the stock market; if stock markets and bond rates are falling, traditionally the commodities market takes off and McGuire sees stock indices going through a similar sideways movement to commodities prices between 1989 and 2000.
In 1999 the price of gold hit a 20 year low of $US252 off the back of the NASDAQ boom and at the other end of the spectrum, a previous high of $US850 in 1980.
McGuire calculates that based on inflation adjusted figures in today’s dollars that high in 1980 would now be between $US2400 and $US2500.
“We are well off that,” he declares, concluding; “so we are only 40% through the leg of this particular bull market”.
Gold’s enduring appeal harks back to the ancient Egyptians; it has played a role in shaping world history for thousands of years. But despite its revered status and romanticised image, its value as an investment has waxed and waned.
In India, the largest gold buying country in the world, its popularity as a dowry inclusion has long led to a peak in buying during the wedding season, from November to mid-December. “About 15 to 20 million Indians get married a year and the dowry is a big part of the ceremony,” says McGuire. A booming middle class in India is a significant factor driving increased demand for the metal.
Currently gold holds a particular allure given fears of inflation, the inherent risks in the financial market and the falling value of the US dollar. Investors are seeking out safe havens far away from a volatile equities market.
Angus Geddes, chief executive of Fat Prophets doesn’t believe that gold is in a long-term bull market, however he does anticipate a rising gold price over the medium term – which he defines as six months to three years.
Geddes tips periodic corrections but foresees gold easily attaining between $US2000 and $US3000 an ounce in the next three to five years.
He cites three main drivers: the fear of inflation (precious metals usually perform well during inflationary periods), Central Banks printing too much money (flooding the world with liquidity which causes inflation) and the instability within the financial sector (just last week Bear Stearns was taken over by JPMorgan).
Instability within the financial sector, the worst in 20 to 30 years, is beneficial to gold because it is an unencumbered asset. Geddes reckons gold could come back into vogue as a popular asset class for fund managers around the world. “They are now looking at gold as a legitimate investment to have in their portfolios,” he says.
Gold was once traded primarily as a hedge against inflation, but today it’s more to do with a “flight to quality”, says Oliver Stevens, head of dealing at IG Markets. He doesn’t believe that the price of gold is strongly influenced by factors of supply and demand at the moment.
“It’s not gold per se that people want,” he says. “Much like the price of crude oil, it’s other factors in the market that’s forcing up the price of gold,” he believes.
“The price of crude is decoupled from the whole supply and demand equation because all the indications are that there is plenty of crude oil.
“It’s going up because people are buying it as the US dollar continues to fall.” Ditto the price of gold, says Stevens.
“That makes it very risky for clients because if these positions start unwinding we could see $US100 fall in a matter of a day or two,” he warns.
Having said that, Stevens agrees that the gold price is in a long-term bull run but stops short of putting a figure or a projected time frame on its climb.
So how do investors get on board the precious metal? While in the past, most investors were restricted to just buying gold miners or stocks exposed to the underlying physical metal, today you can trade the physical gold price via contracts for difference (CFDs) or warrants, taking out short or longer-term bets depending upon your viewpoint.
“We’re seeing a great increase in people trading all precious metals because they have access to them through CFDs and other products and the net makes it all so much more accessible,” notes Stevens.