Gold Bullion: 4
Fundamental Facts by Frank Holmes |
May 17, 2013
Some things to remember amid the
volatility of the gold price...
When volatility prevails in the gold market,
I love seeing so many different opinions because it promotes
critical thinking and healthy markets, writes Frank Holmes,
CEO and chief investment officer of US Global Investors.
But because gold is unlike any other commodity, many perspectives
can be extreme, such as "goldenfreudes" who take
pleasure in gold bugs' pain.
I continue to persuade readers to take a balanced and thoughtful
approach to the yellow metal. With this in mind, here are
four facts to remember about gold that should help neutralize
those extreme bullish and bearish views.
1. You can't print more gold
The Federal Reserve continues to print fresh, crisp stacks
of US Dollars amounting to $85 billion every month, driving
up the balance sheet to almost $3 trillion Dollars. If Ben
Bernanke continues churning out Dollars at this rate, by
2016, the balance sheet will more than double to $7 trillion
And research has found that the price of gold moves in
near-lockstep to each increase in the Fed's balance sheet.
Even with the incredible two-day drop in gold prices, US
Global portfolio manager Ralph Aldis calculated that the
correlation between the rise in gold and the US balance
sheet is 0.96. Perfect correlations of 1 are extremely rare
in markets, but gold and the balance sheet have moved in
sync with each other since 1999, before gold's bull run
2. Gold is viewed as a currency
by central bankers
As gold was falling on April 15, Carl Quintanilla from CNBC
asked me what I thought about how investors viewed currencies.
I feel investors should look at how central banks around
the world are viewing their own reserves. Although Cyprus
and Italy were possibly forced to sell their gold holdings
to pay down debts, take a look at the actions of emerging
countries central bankers who are scooping up gold.
The World Gold Council (WGC) reported that in 2012, central
banks purchased 535 tons when only a few years ago central
banks were net sellers of gold. And it's important to keep
in mind that these central banks love these corrections,
as they can purchase gold at cheaper prices.
Russia bought 75 tons, bringing its gold holdings to the
seventh largest in the world, with about 1,000 tons. Last
year, Brazil, Paraguay and Mexico purchased gold, as did
South Korea, the Philippines and Iraq.
Turkey is another country that has been building reserves,
though not from purchases. Rather the WGC says its growing
gold reserves "reflect the increasing role that gold
plays more broadly in the Turkish financial system as these
reserves are substantially pledged from commercial banks
as part of their required reserves."
While the tonnage is only a fraction of the overall gold
market, it is widely acknowledged that central banks are
building their supplies of gold as a means to diversify
their holdings away from the US Dollar and the Euro. As
a percent of total reserves, many of these emerging countries
mentioned above own very little gold. In fact, Pierre Lassonde,
chairman of Franco-Nevada, has noted that even if emerging
market central banks wanted to increase their gold reserves
to 15 percent of total reserves, they'd have to buy 1,000
tons every year for the next 17 years!
3. A lack of love from the Love
Trade is affecting fundamentals
Too many people focus on the Fear Trade, which is when
investors buy gold coins or a gold ETF out of a fear of
the fallout that may result from governments' rising debt
levels and weakening currencies.
The Love Trade, on the other hand, is the buying of gold
out of an enduring love for gold. Two emerging countries
that make up almost half of gold demand – China and
India – have had a long relationship with the precious
metal that is intertwined with their culture, religion and
economy. With half of the world's population buying gold
for their friends and family, it's important to put into
context what is happening in their countries.
It was announced this week that China's income growth slowed
in the first quarter of 2013, with urban household disposable
income rising only 6.7 percent on a year-over-year basis.
This is down from 9.8 percent in the first quarter of 2012,
and "the slowest pace since 2001," says Sinology's
This is very important to gold, as China's income growth
has been shown to be highly correlated to the price of the
precious metal over the past decade.
China's weaker GDP also disappointed gold
investors, but I believe this is only a temporary setback.
It's only a matter of how fast China will move to stimulate
the economy, since this is a key to global growth.
In India, gold consumption has been hurt by both a weak
rupee and government taxes on imports. In the first quarter
of 2013 alone, gold imports declined 24 percent, according
4. Corrections happen, but have historically offered
As of mid-April, the gold price on a year-over-year percentage
change basis registered a -2.6 standard deviation. While
minor corrections in the gold price happen frequently, a
move this severe has never occurred before over the previous
2,610 trading days.
With gold's standard deviation drastically
below the "buy signal" blue band, we consider
the yellow metal to be in an extremely oversold position
on a 12-month basis. The probability that gold will move
higher over the next several months is high.