February 3, 2012 5:48 pm
Investors beware gold’s deceptive beauty
Has gold fever come to this? As the metal reached a two-month high this week, thieves smashed a glass display case and stole $3m of gold nuggets from a northern California courthouse, relics from the region’s 1851 gold rush.
Unless they are jewellers, the thieves will have to find a buyer. And, since gold is hoarded, not consumed like oil or grain, the nuggets will now join the tonnes of available world stocks that hang over the market.
Scrap made up more than a third of world gold supplies last year, while gold mine output is growing, according to GFMS, a precious metals consultancy. Gold’s rebound to as much as $1,760 a troy ounce this week, up 16 per cent from late December, follows a few months of startling price moves that tarnished gold’s reputation for stability.
Goldbugs will tell you the case for the metal has only become stronger with the Federal Reserve’s commitment to extend zero interest rates through to late 2014 and hints of more monetary easing in the US, Europe and UK. In euro terms, gold is almost at an all-time high, helped by the European Central Bank’s deluge of loans to the eurozone banking sector.
These moves have invigorated investors’ risk appetite but also revived questions about the outlooks for the dollar and euro. Globally, central banks have become net buyers of gold, last year purchasing the most since 1964, GFMS says.
These institutions are steady. But investors are flighty. And with the only source of fresh demand coming from speculative investors seeking bars, this sets the stage for a potentially ugly unravelling.
Ominously, experts cannot seem to agree on what makes gold valuable. One day, it is a hedge against the debasement of paper money, hyperinflation and other macroeconomic frights.
“For all investors, gold is an insurance against a breakdown in the international financial system,” Greg Robinson, chief executive of major gold producer Newcrest Mining, said this week, according to a Reuters report. Indeed, gold slumped on Friday as the US reported better than expected payrolls numbers. Debates on gold have even bled into the US presidential race, with candidate Newt Gingrich joining libertarian rival Ron Paul in discussing a return to a gold-backed dollar. But the following day gold is a member of the “risk-on” club.
So far this year, gold has risen significantly, while the Standard & Poor’s 500 stock index added 7 per cent. As the eurozone crisis deepened late last year, gold sank from an all-time high of $1,920 an ounce as investors demanded dollars – debasement be damned.
One metals analyst at a bank captured the muddiness of the gold case perfectly. “Gold,” the analyst wrote this week, “appears in the process of convincing investors that its stint as a hybrid between a safe haven and a risk asset is coming to an end.” When the very identity of an investment is in flux, it may be time to step back and ask what it’s really worth.
This uncertainty is reflected in gold’s volatility. While gold gained in each of the past 10 years, the metal tumbled almost $400 late last year, unnerving anyone who sought it out as a bulwark against more risky corners of a portfolio.
Gold has always been difficult to value because it has no yield and little utility other than rings, bracelets and necklaces.
However, with real returns on Treasury bonds negative, the same quandary applies to other traditionally safe investments, or even what goldbugs like to call “fiat money”. These assets become as much a reflection of investor fears and hopes as any rigorous valuation.
Gold’s future direction may well hinge on whether central bankers are able to stoke the economy without touching off an inflation brush fire along the way. Interest rates could rise quickly after 2014, creating opportunity costs for holding gold. Gold crumbled from inflation-adjusted records in 1980 after the Federal Reserve jacked up rates to fight inflation. Meanwhile, investors have a lot of gold to unleash if they want to. Holdings in the largest gold exchange-traded fund stand at nearly 1,300 tonnes, close to an all-time high. The nugget thieves of California may have picked a top.
Copyright The Financial Times Limited 2012.
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