Gold Bullion: 4
Fundamental Facts by Frank Holmes |
May 17, 2013
Some things to
remember amid the volatility of the gold price...
When volatility prevails in
the gold market, I love seeing so many different opinions
because it promotes critical thinking and healthy markets,
writes Frank Holmes, CEO and chief investment officer of
US Global Investors.
But because gold is unlike any other commodity,
many perspectives can be extreme, such as "goldenfreudes"
who take pleasure in gold bugs' pain.
I continue to persuade readers to take a
balanced and thoughtful approach to the yellow metal. With
this in mind, here are four facts to remember about gold
that should help neutralize those extreme bullish and bearish
views.
1. You can't print more gold
The Federal Reserve continues to print fresh,
crisp stacks of US Dollars amounting to $85 billion every
month, driving up the balance sheet to almost $3 trillion
Dollars. If Ben Bernanke continues churning out Dollars
at this rate, by 2016, the balance sheet will more than
double to $7 trillion Dollars.
And research has found that the price of
gold moves in near-lockstep to each increase in the Fed's
balance sheet.
Even with the incredible two-day drop in
gold prices, US Global portfolio manager Ralph Aldis calculated
that the correlation between the rise in gold and the US
balance sheet is 0.96. Perfect correlations of 1 are extremely
rare in markets, but gold and the balance sheet have moved
in sync with each other since 1999, before gold's bull run
began.
2. Gold is viewed
as a currency by central bankers
As gold was falling on April 15, Carl Quintanilla from CNBC
asked me what I thought about how investors viewed currencies.
I feel investors should look at how central banks around
the world are viewing their own reserves. Although Cyprus
and Italy were possibly forced to sell their gold holdings
to pay down debts, take a look at the actions of emerging
countries central bankers who are scooping up gold.
The World Gold Council (WGC) reported that
in 2012, central banks purchased 535 tons when only a few
years ago central banks were net sellers of gold. And it's
important to keep in mind that these central banks love
these corrections, as they can purchase gold at cheaper
prices.
Russia bought 75 tons, bringing its gold
holdings to the seventh largest in the world, with about
1,000 tons. Last year, Brazil, Paraguay and Mexico purchased
gold, as did South Korea, the Philippines and Iraq.
Turkey is another country that has been
building reserves, though not from purchases. Rather the
WGC says its growing gold reserves "reflect the increasing
role that gold plays more broadly in the Turkish financial
system as these reserves are substantially pledged from
commercial banks as part of their required reserves."
While the tonnage is only a fraction of
the overall gold market, it is widely acknowledged that
central banks are building their supplies of gold as a means
to diversify their holdings away from the US Dollar and
the Euro. As a percent of total reserves, many of these
emerging countries mentioned above own very little gold.
In fact, Pierre Lassonde, chairman of Franco-Nevada, has
noted that even if emerging market central banks wanted
to increase their gold reserves to 15 percent of total reserves,
they'd have to buy 1,000 tons every year for the next 17
years!
3. A lack of love
from the Love Trade is affecting fundamentals
Too many people focus on the Fear Trade,
which is when investors buy gold coins or a gold ETF out
of a fear of the fallout that may result from governments'
rising debt levels and weakening currencies.
The Love Trade, on the other hand, is the
buying of gold out of an enduring love for gold. Two emerging
countries that make up almost half of gold demand –
China and India – have had a long relationship with
the precious metal that is intertwined with their culture,
religion and economy. With half of the world's population
buying gold for their friends and family, it's important
to put into context what is happening in their countries.
It was announced this week that China's
income growth slowed in the first quarter of 2013, with
urban household disposable income rising only 6.7 percent
on a year-over-year basis. This is down from 9.8 percent
in the first quarter of 2012, and "the slowest pace
since 2001," says Sinology's Andy Rothman.
This is very important to gold, as China's
income growth has been shown to be highly correlated to
the price of the precious metal over the past decade.
China's weaker GDP also
disappointed gold investors, but I believe this is only
a temporary setback. It's only a matter of how fast China
will move to stimulate the economy, since this is a key
to global growth.
In India, gold consumption has been hurt
by both a weak rupee and government taxes on imports. In
the first quarter of 2013 alone, gold imports declined 24
percent, according to Mineweb.
4. Corrections happen, but have
historically offered buying opportunities
As of mid-April, the gold price on a year-over-year
percentage change basis registered a -2.6 standard deviation.
While minor corrections in the gold price happen frequently,
a move this severe has never occurred before over the previous
2,610 trading days.
With gold's standard deviation
drastically below the "buy signal" blue band,
we consider the yellow metal to be in an extremely oversold
position on a 12-month basis. The probability that gold
will move higher over the next several months is high.