Is it time to buy gold?

By Gladstone Wynter

(Jamaica Observer) – The recent volatility of gold prices has left a lot of investors asking the question, “Is it a good time now to buy gold?” Some experts will say, “Yes, go buy”, while others will say, “no!” But what is the real story behind gold.

Since the beginning of time, gold has been one of the most popular, precious and sought after metal. It is one of the greatest store and show of wealth, next to diamonds, pearls and rubies; the reason being its physical and practical attributes. Historically it was easy find and mined this has changed.

Gold is malleable and has been transformed or used as coins, utensils, clothing and building material.

Additionally gold conducts electricity efficiently, bettered only by copper and silver in its industrial uses; and is used in most electrical devices including cellphones parts such as switches, connectors and relay; which helps to prevent corrosion.

Gold medicinal properties have been utilised for over 3,000 years due to its bio-compatible nature. It is used in dentistry for fillings, crowns, bridges and orthodontic appliances. Treatments for rheumatoid arthritis, lagophtalmos and certain cancers benefit from gold’s diverse medical use.

Gold prices, as with all other commodities, are determined by supply and demand. The primary demand for gold is jewellery, industrial uses, gold bar, and coins, financial products (such as ETFs) and central banks (and other financial institutions such as the IMF) net purchases. Over the last quarter to March 2013, the demand has decreased by 19 per cent due to the decrease in the demand for investment products, which sold 176 tonnes of gold and financial institutions which demanded 25 per cent less gold tonnes.

The dynamics of gold demand has changed drastically from 80 per cent for jewellery in 2001 to 43 per cent in 2012, while financial products (investments) have moved from 10 per cent to 47 per cent over the same period. The reason being pervasively bad economic activities such as the 2008 global financial collapse and recession, the European debt crisis, and the shift of economic power from the developed to the emerging economies led investors flee to “safety” — gold.

This period has been characterised by huge budget deficits, low reserves, quantitative easing and low interest rates, all pointing to future high inflation and asset value erosion. During this time, popular gold-based exchange traded funds such as GLD, IAU and DGL returned 7.95 per cent, 8.06 per cent and 6.51 per cent over the last five year period.

The supply of gold comes from gold mines production, sale of financial institution reserves and the recycling of above ground stocks.

The supply in gold has been low since 2001 due to production cuts in the 1990s as prices hovered at US$286 per ounce, limited success in finding new mines and declining ore grades discovery in the late 1990s.

Gold is a special commodity which is more affected by the big macroeconomics factors of interest rates and inflation, rather than fundamental demand and supplies. These relationships have been observed since the Gold Standard was used as the reserve currency of the countries around the world.

Under this untenable arrangement the value of different currencies were pegged to the value of gold. Hence, countries were unable to respond to shocks in their local economies such as a sudden increase in oil prices or wars. Monetary tools such as increasing the money supplies to counter such shocks were made redundant (unless the   standard was suspended); and resulted in economic underperformance characterised by high unemployment. This relationship was changed in 1973, when the US officially abandoned the gold standard and the US$ became the de facto reserve currency.

Gold has lost its pristine position as standard for 40 years now. However, in times of distress, as experienced over the last four years, investors will acknowledge its value as store of wealth and pour monies into physical gold or other investment vehicles that mimics its return.

And those same investors will sell gold and its derivatives when the risk has abated (as it is now) and the economic outlook is rosy and poised for growth (as it is now).

Gladstone Wynter is the Assistant Manager of the Wealth Division at Stocks & Securities Ltd. and may be contacted at gwynter@sslinvest.com.

 

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