Gold: Insurance or Risk Asset?
By Adrian Ash
July 26, 2007
Could the trend of gold up,
everything else up, have just reached its end...?
THE FINANCIAL MEDIA took a while to catch on.
"Gold funds fattened on war, global
instability and a falling Dollar in 2003," exclaimed USA
Today as the New Year of 2004 got underway. The popular US
paper failed to note that none of those calamities had stalled
the equity markets ongoing recovery, creating the weird
situation of rising Gold
Prices alongside rising stock markets.
"Gold bugs hope that 2004 will be even
better," it went on, "but an outbreak of good news
could dash those hopes." Yet no. Good news for global stock
markets collided with great news for bond prices, real estate
and emerging markets in 2004.
Oil traders grew rich as well, but all this good
news for financial markets failed to stop the bull market in
gold. The metal rose more than 10% by the fall of that year.
"At $420 an ounce," said USA Today
as 2004 drew to a close, three years after the bull market in
gold had begun, "gold has become a fairly expensive
insurance policy." But by the end of 2005, golden insurance
cost more than $500 per ounce – a 23-year high – and few
people buying the new exchange-traded gold funds such as
StreetTracks GLD seemed to worry about just what it was they
were insuring.
The insurance policy of tracking the Gold
Market, if not actually owning any gold whatsoever, kept
paying out without any awful calamity striking the planet. Or
rather, nothing awful enough to derail the rally in world stock
markets was needed to keep pushing gold higher. Equities and the
Spot
Price of Gold just kept rising together.
"There are serious drawbacks with gold investment of any
kind," warned a professional financial advisor to the BBC
in London in late 2005. "Except for the past three years,
the price of gold has been on the slide after a peak in
1980."
"Investors have piled into gold in recent
months," added the Financial Times, as if aghast.
"Many are betting on rising prices."
Just think – betting on the gold market because
you think it's going up! Of course, as an insurance policy, then
perhaps gold did look expensive. But the old investment saw of
advising you to "Put 10% of your money in gold and just
hope you don't need it," became out-moded as the metal rose
alongside stocks, bonds, junk, real estate, credit derivatives
and oil prices alike.
Who cared if nothing bad happened – or nothing
bad enough to derail the boom? As a risk-capital play, just
another hot snack in the lunchbox of tasty reflation treats,
gold just kept rising on the tide of money pushing all boats
higher.
Indeed, by late 2006, the Gold
Market's uptrend starting amid the Tech Crash's worst months
of 2001 continued to run higher as the Dow approached its own
former highs, too. Real interest rates had turned negative,
helping to destroy the Dollar and making borrowing to speculate
smell like a no-brainer. And all this time gold itself, a losing
investment for the two decades to 2001, remained a classic
"buy" on the charts.
Spot
Gold Prices have since continued to rise above their 200-day
moving average – itself rising strongly – giving a classic
if crude signal for chart-minded traders to stick with the
trade. And so far this month, gold has been rising even as
global stock markets have turned south.
Could the trend of gold up, everything else up,
have just reached its end?
Last week saw the price of gold rise 2.3% for US
Dollar investors, while the broad S&P equity index lost 1.1%
of its value. Gold also gained nearly 2.1% against the Euro,
while the EuroFirst 300 index of European stocks lost 1.7% for
the week. British investors saw gold rise 1.4% against the Pound
Sterling, while the UK's leading 100 shares dropped 2% of their
value on average over the week.
Does this mark a new departure for that investment
insurance known as gold? "Of late," notes Wolfgang
Wrzesniok-Rossbach in the latest metals report from Heraeus, the
German refining giant, "when the financial markets came
under pressure, gold also found itself losing ground."
Indeed, since 2003 the gold market has risen –
and fallen – in lock-step with the world's major stock
markets. By the end of 2006, as James Grant has noted in Grant's
Interest Rate Observer, the correlation between gold and
the S&P500 had shot higher, very nearly reaching the magical
"1.0" reading that would signify a perfect arm-in-arm
relationship.
Hence the comments littering Bloomberg and Reuters
earlier this year whenever gold took a hit. "There's a
flight from risk assets," said pundit after pundit, all
noting a drop in both stock markets and gold.
"But [now] this time around it seemed to react
inversely," says Wrzesniok-Rossbach. Gold so far in July
has jumped higher; the S&P – along with global stock
markets – is barely treading water, albeit near new record
highs.
"Even so, to make a qualified assertion that
gold has re-discovered its traditional role as a 'safe haven' is
perhaps a little too early," warns Wrzesniok-Rossbach,
which perhaps will prove true. But for now, as the S&P and
Dow tiptoe away from their latest all-time record highs, an
insurance policy owned outright – rather than held in trust
through the complex legal contracts of exchange-traded gold
funds – might mean Physical
Gold Bullion could look cheap.
"Gold is still not getting the headline space
it will in the next year," says John Dizard in the Financial
Times, "but it has broken out of the desultory
downtrend that began in April 2007." With the ongoing
collapse of complex credit derivatives now threatening to knock
out the support of mergers & leveraged buy-outs from under
the stock market, "the perception of underlying systemic
risk is not going away," says Dizard. Indeed, "this
trend also seems to be supported, so far, by the European
national central banks, who aren't selling as much gold as they
were."
Gold up, everything else down? Stranger things have
been known...such as the four years of strong correlation
between gold and the stock market starting in 2003.
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