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Why is gold price so depressed?

lawrence-williams|By Lawrence Williams|

The ‘Nobody Cares’ quote was the theme of Grant Williams’ polished performance at Mines & Money London last week.  Grant (no relation) is a Senior adviser to Vulpes Investment Management in Singapore – but is perhaps better known as the author of the always entertaining and enlightening Things that make you go hmm… newsletter.  This has been published since 2009 and has become one of the world’s most widely read financial publications. TTMYGH primarily covers the impacts of economic policies and geopolitics on all types of investment and occasionally puts a particular emphasis on gold, which Grant sees as having some very strong years ahead once it gets through the current malaise in perception – indeed indifference to gold as an asset class – throughout much of the financial world.  As he says Nobody Cares!

Grant is in great demand as a conference speaker and thus travels the world to put his always highly entertaining, but extremely pertinent, slant on the subjects he covers.  How he has time to still write his newsletter, while keeping up with what is going on in global finance and politics and preparing his conference presentations, is a mystery.  His conference presentations are indeed performances, including sound, videos and interactive illustration and that at Mines & Money, although shortened to fit the time available, was one which few audience members will forget.

‘Nobody Cares’ is perhaps a slight exaggeration as there are nations which do care, and those nations do have a big impact on global gold demand – notably China, India and Russia.  Major gold producing nations also care, but primarily in the context of the gold exports financial impact on their economies, not necessarily in terms of gold investment.  But Grant’s talk largely revolved around the perception, or rather lack of it, on gold as an asset class among most of the Western World’s institutions and investors.

He opened his presentation with some recent headline quotes from major media – like ‘Gold worst investment in history’ and ‘Gold is just a pet rock’ where commentators have been disparaging gold investment despite it actually performing better than most other commodities over the past few years.  Indeed, if one takes a specific time slot – say since the beginning of the 21st century – gold has still outperformed most other asset classes even taking into account the 44% fall from its 2012 heights.

But in terms of perception he made some very good points.  As gold has fallen out of favour, as demonstrated by the number of Google searches for it declining drastically – even the search term ‘raw sewage’ has been generating 1.8 x more searches of late!  Despite virtually zero – or even negative – interest rates which are normally positive for gold, the equities markets have been doing far better, artificially prompted by Central Bank stimuli.  Hedge funds and Western investors have thus been exiting from precious metals investment.  Gold could well be at, or near its bottom.  Could there be anything more positive for gold? he asks.

A big factor in the gold price fall has been the strength of the US dollar – gold tends to move counter to the dollar and the latter has risen by around 25% against a basket of global currencies. As a result of the mostly adverse media coverage, which perhaps suggests gold has done worse than it actually has, gold now only accounts for an almost infinitesmal percentage of global financial assets as its perception as an ongoing store of value – even among the most savvy funds – has been falling dramatically over the past ten years or so.  If there is even a small switch in this perception, Grant notes, things could change equally dramatically to the positive.  A 0.3% growth in pension fund allocations into gold, for example, would represent around $100 billion, equivalent to virtually all the current holdings in GLD, GDX, XAU etc.  This would have a massive impact on the gold price.

But, Grant feels, the day is approaching when everyone will again care about the gold price. Should global equities markets collapse – seen as almost inevitable over time – despite all the Central Bank efforts to hold them up, or some of the World’s political flashpoints deteriorate seriously, gold will take back its place as a prime safe haven investment.  Consider it to be like flood insurance he says.  You take it out, but hope you’ll never have to draw on it, but you will still fork out for it year in, year out.  Gold should be treated in an investment portfolio in the same manner.

Thus he sees the gold market as dangerously out of sync with reality and sees this as reversing in the near future.  In a subsequent panel discussion he commented that he’d never seen gold so unloved by the market, making it a great time to buy.  There is a growing likelihood of a sea change in sentiment, and that when it does start to pick up gold will move hugely and comfortably take out its previous highs despite anything Central Banks and their allies can do about holding it down.

The panel suggested that the turn around could be close – particularly if the U.S. Fed either delays interest rate raising again (seen as unlikely), or does so and is forced to backtrack within a few monts (seen as likely). Credit: Sharp Pixley