Expert Zone
Straight from the Specialists
What has happened to gold?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Gold has disappointed, down 4 pct over the last 4 weeks, despite the risk-related Brent crude oil advancing 3 pct. Gold appears to have become the victim of a steadily improving global macro environment, where the pressing problems and risks of 2011 appear to be easing, if not being resolved. Slowly the market appears to be building a consensus that the growth outlook for 2012 looks more positive. Consequently gold’s ‘safe-haven attraction’ is starting to lose out to more growth oriented investments. The biggest shift in gold’s fortunes has come from the U.S. After the gold price advanced 7 pct in February on the back of the U.S. Fed Chairman’s January 25 hint of another round of quantitative easing (QE), the March 13 FOMC statement appears to have triggered gold’s fall. While the statement did not contain an overt change in sentiment, it did acknowledge a better growth profile despite the continuing risks. Its ‘less wary’ tone suggested that QE possibilities were minimal.
The market appears to have gone further in its read of the FOMC statement and now appears to reflect the possibility of the U.S. Fed normalising its monetary policy earlier than the U.S. Fed’s reiteration that there will be no interest rate rise before late-2014. An ending of the ‘highly accommodative stance for monetary policy’ was considered not good for gold. UBS economists expect that the U.S. Fed will begin raising rates in mid-2013 and do not anticipate further quantitative easing.
The mood shifted has manifested itself in a rising U.S. dollar, now at an 11-month high against the Yen, and in rising bond yields. Strengthening U.S. employment and manufacturing data is building a ‘growth leveraging’ environment. Recent rises in leading indicators, such as the US Empire State Index (20.2 in Mar from 19.5 in Feb) and the Philadelphia Fed index (12.5 in March from 10.2 in Feb) and the continuing downtrend in jobless claims is augmenting the improving data flow. Job growth in the U.S. over the past six months has been the strongest since 2006 and UBS now expects that U.S. unemployment will drop to 7.7 pct by the end of this year.
In Europe, both the second tranche of LTRO and a successful restructuring of the Greek private sector debt that appears to have ring fenced the Greek debt crisis, have underpinned a more positive, less risky and hence less gold-friendly tone. While the euro area did fall into recession in Q411, recent lead indicators have brightened now suggesting that European economic weakness will not be as severe as we previously assumed. Meanwhile northern Europe, led by Germany, continues to provide upside surprises; the recent influential German ZEW index jump from 5.4 to 22.3, its highest level since June 2010.
China in the main has also added to more positive global outlook for growth. January-February data brought surprises with February CPI inflation falling from 4.5 pct in January to 3.2 pct, again undercutting gold’s role as a hedge against inflation. Fixed asset investment was stronger than expected and official steel production reported by the National Bureau of Statistics was 13 pct higher than CISA estimates for January-February. While the data and regional anecdotal evidence were confusing, the broad picture of a national soft landing, preparing the way for a cyclical rebound later in the year, appears to be confirming.
Further gold downside is likely if this ‘synchronous global growth’ story becomes more sustainable, and if U.S. yields and U.S. dollar continue to rise. Gold’s ability to rebound will hinge on doubts about global growth and the return of uncertainty about politics and debt, particularly for Asia and Europe. Market unfriendly French and Greek elections in coming months could be gold catalysts. In the meantime, gold is increasingly technically challenged. Having broken through its 200-day moving average at $1676, it now challenges the next key technical support level of $1625, the 62 pct retracement of the recovery since the December 29 low. A break below that target would bring into focus the $1605, the January 9 low, just ahead of the $1600 psychological level which has only been breached on two brief occasions in the last six months.
Gold prices: Bubble or fundamental
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Suddenly all eyes have turned to the yellow metal. Some say that it’s a bubble while others give a lot of demand-supply reasons. Fall of the dollar and other economic reasons suggest that it has miles to go.
Let me try a more fundamental way to analyse this. But before that, I need to first take you through the basics of share price valuation. Why is that necessary? Hopefully the dots will be joined in due course.
Basic finance taught us that the value of a corporate is nothing but the present value of all its future profits, till infinity. Although this model has a lot of assumptions, conceptually this seems logical.
Simultaneously, a corporate also has assets — namely, its book value. That is nothing but the value of its existing contracts, fixed assets, inventory — to name a few. The third major component for the corporate is the total outstanding borrowing.
Just to summarise, we have now created 3 variables — the value of the company (P), the price of its outstanding debt (V), and the value of the existing assets (B).
Now imagine what happens when the expected future revenue of the corporate drops. The obvious answer — a drop in the market value of the company (i.e. P). What happens next? The people who have lent money start getting panicky whether the company will be able to repay the money they have borrowed. How will that affect the total value of outstanding debt? The answer can be given in two ways. For the technically savvy, it just means that the rate at which investors discount the bond increases (due to its lower credit-worthiness) and therefore reduces the value of V. For the intuitive guys, it means that the probability of the company defaulting goes up and so I, as a lender, am happy getting back a lower amount today rather than waiting till maturity and run the risk of getting nothing.
The golden bubble?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The spot price of gold crossed $1500/oz on April 22 and confirmed the belief that gold and, even more so, silver, are the best investments. In the last one year, gold gave a return of more than 30 percent; equity (Sensex) a mere 10 percent.
That was not always so. For more than 28 years before 2008, gold was a dead investment. The price of gold which peaked at $850 in 1980 dropped continuously to recover only in the last decade to cross the earlier peak in January 2008. What is surprising, gold was not even a hedge against inflation. Had gold prices increased at the same rate as CPI, gold today would have cost $2200/oz.
Gold has no intrinsic value except for some industrial uses. Hence gold accumulates as stock. New mining of gold is small and expensive. Of silver it is negligible. As such, prices of these metals depend entirely on demand.
Nearly a half of the world stock of gold stock is in jewellery, mainly in India and China; the other half is investment, mainly by the central banks and occasionally by private sector. The central banks no longer trade in gold. But to private investors, gold is one of the assets in their portfolio and therefore subject to swings.
Being one component of the asset portfolio, investment in gold depends on the return from investment in other assets. Gold is an anchor private investors hold on to when prospects for the rest of the assets appear dim. After 28 years, gold came to life because the world economy got into a crisis. Gold was once again in demand and gold prices shot up.
There are a variety of assets people choose to invest in. The two main assets are commodities and securities. The most competitive asset against gold is equity.
If the central banks no longer trade in gold to settle debts between them, then why do they want to stockpile gold? Why Libya’s gold is big news?
The website of Bank for International Settlements says, ‘Apart from fostering monetary policy cooperation, the BIS has always performed “traditional” banking functions for the central bank community (eg gold and foreign exchange transactions….’
(http://www.bis.org/about/history.htm)
Value is in the eye of the beholder.
