Daniel Sacks, co-portfolio manager of the Investec Global Gold Fund, continues to believe that gold is well supported in the current environment
The gold price fell by 7% in December 2009, ending the year at $1 090 per ounce. Intra-month, the metal hit a new all-time high when it traded at just over $1 200 per ounce. Gold gained nearly 30% against the US dollar in 2009, recording the tenth year of consecutive gains.
Continued strength in the US dollar is likely to be painful for investors with long gold positions, as evidenced by December’s move, and strategists contend that the potential for further US dollar strengthening is possible. However, in spite of gold’s vulnerability to a stronger US dollar, we continue to believe that gold is well supported in the current environment for the following reasons:
- In our view, a below par recovery in the face of constrained consumer spending is more likely to continue to encourage gold investment, due to expectations that fiscal and monetary stimulus is likely to continue to fuel large government deficits and pose risks to the longer-term value of the US currency.
- Central banks have been supportive of the gold market as net buyers from the IMF. Of the IMF’s 403.3 tonnes of authorised sales, 212 tonnes went to central banks in India, Sri Lanka and Mauritius. China, another possible buyer, has yet to participate. In addition to the potential shift of central banks from being net sellers to net buyers of gold, we believe the continued weakness in real interest rates continues to provide strong support to gold prices over the medium term. The yield on the 10-year US Treasury Inflation-Protected Securities remains under 1.5%. When money is easy and demand moves much faster than supply, prices can explode. In the 18 months from July 1978, gold prices went from $185 to $850 per ounce (equating to $2,400 in today’s dollars).
- Notwithstanding the growing chorus of bullish sentiment, debate remains as to how ‘real” the economic recovery is. With the fear of a significant financial crisis waning, debate is now turning again to how the recovery will play out. In almost all but a global soft-landing scenario, we believe gold is likely to rally. With a global recovery unlikely to be smooth, the two main risks to most asset values are inflation and a weak US dollar, both of which are positive for gold.
- Safe haven buying as an alternative currency is set to continue, in our view. However gold is the only currency whose production is going down rather than up in double digits. No supply response to high gold prices is anticipated, and mine production is on a declining trend of approximately -1% per year.
We also believe that gold shares still have significant upside for the following reasons:
- The high and rising gold price.
- Costs have stabilised (energy and materials costs are falling).
- Weaker producing currencies, which further widens margins.
- Relative to the gold price and to their usual valuations, gold shares appear oversold.
In conclusion, we believe that gold has finally broken clear of the $700 to $1 000 per ounce range that dominated the last two years and that we are probably in the process of finding out where the new higher range will be established. We believe that the degree of investment demand is likely to force a peak that is nearer $1 300 per ounce over the next six months with $1 000 an ounce becoming the long-term floor