When everyone was stunned at the dramatic drop in the price of gold, Goldman Sachs was not. CNBC reported that two weeks prior to the metal taking the elevator down, the firm's commodities research team gave a call to short gold. Though the analysts too admitted that the decline on April 15, 2013 was rapid and greater than expected.
Back on April 10, when gold was ranging in the upper-$1,500/ounce, Goldman recommended shorting the metal on the grounds that gold didn't move up significantly when markets were anxious about the bailout of Cyprus and restructuring of its banks.
Within days of that call, gold fell almost 16% to $1,321/ounce. While the bailout of Cyprus did not send gold higher, reports that Cyprus would sell gold to cover its shortfall sent the metal tumbling, as traders bet other European countries might also sell gold to raise cash.
The fall in the precious metal made everyone wonder if we have entered a gold bear market.
Ted Scott, Director – Global Strategy, F&C Asset Management noted that the dramatic fall in the price of gold on April 15, 2013, was the biggest since 1983. His view was that the recent sell-off is the biggest since gold started its ascent and with a fall of over 20% since it peaked, gold has been officially declared to be in a bear market. Yet, he goes on to argue that investors must decide whether the change is for fundamental reasons or if it represents a temporary setback. He then goes on to cast his bet with the latter view and believes that the reasons for the dramatic fall in the gold price is largely tactical and technical. He does not think that it undermines the long term and strategic case for holding gold as an essential component of a diversified investment portfolio.
Financial Times reports on other portfolio managers who are of the same view.
David Rosenberg, Chief Economist & Strategist, Gluskin Sheff, believes it is a correction in a bull market. He adds that anyone who predicted 10 years ago that the gold price would be trading in a bear market in 2013 after a correction of more than 20% at around $1,400 an ounce “would have been carried out in a straitjacket”.
Richard Davis, Portfolio Manager – Natural Resources Equity Team, BlackRock, does not see this sell-off as the start of a bear market for gold. According to him, the sell-off in gold mining stocks has been indiscriminate, presenting “some excellent buying opportunities for the longer term”.
Joe Foster, Portfolio Manager, Lombard Odier World Gold Expertise Fund, says the fundamentals for gold as a haven have not changed and the gold market has experienced a “mid-cycle correction” which “could represent the buying opportunity of a lifetime” once prices stabilise.
Below is an extract from an outlook report on gold by Reliance Mutual Fund.
Top 10 gold purchasers
|
Country |
Q4 2012 holding (tonnes) |
Purchases in the last 10 years (tonnes) |
|
China |
1054 |
553 |
|
Russia |
958 |
531 |
|
BIS |
520 |
323 |
|
Turkey |
360 |
244 |
|
India |
558 |
200 |
|
Saudi Arabia |
323 |
180 |
|
Mexico |
125 |
118 |
|
Thailand |
152 |
75 |
|
Korea |
84 |
71 |
|
Argentina |
62 |
61 |
· Gold purchases by people in India and China are soaring. These two countries contribute to 52% of the total gold demand right now, vs. just 25% a few years ago.
· Central banks are on a buying spree. In the last year, central banks have bought the highest quantity of gold over the past 48 years.
· Central banks bought more than 145 tonnes in the fourth quarter of 2012. Central bank buying for 2012 rose by 17% over 2011 to sum 534.6 tonnes.
Gold as a percentage of total reserves
|
Country |
Q1 2002 (%) |
Q4 2012 (%) |
|
United States |
58.3 |
75.7 |
|
Italy |
50.2 |
72.1 |
|
France |
49.6 |
70.5 |
|
The Netherlands |
47.2 |
59.7 |
|
Germany |
39.1 |
72.8 |
|
Russia |
11.1 |
9.5 |
|
Sweden |
11 |
12.8 |
|
United Kingdom |
8.3 |
15.7 |
|
Kuwait |
7 |
12.7 |
|
India |
6.3 |
9.9 |
|
Turkey |
5.2 |
16.1 |
|
Cyprus |
4.8 |
62.2 |
|
China |
2.1 |
1.7 |
Gold is only 13% of the reserves of the world.
China and Russia, which have been the largest purchasers of gold in the last decade, have only 1.7% and 9.5% of gold as a percentage to their Treasuries, respectively.
What if 3 countries want to increase gold as a percentage of total reserves?
|
Country |
Gold as a percentage of total reserves (%) |
Additional requirement (tonnes) |
|
China |
5 |
3,000 |
|
|
10 |
6,000 |
|
India |
20 |
500 |
|
|
25 |
625 |
|
Russia |
20 |
900 |
|
|
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