Summary: As share markets fell on uncertainties around the Greek financial crisis, gold has been one of the few commodities to hold its ground. It should never be the sole investment in a portfolio but it does fulfil a role as a sheet anchor.
Key take-out: While tipping a future gold price is a mug’s game, gold is likely to remain immune to moves on financial and commodity markets.
Key beneficiaries: General investors. Category: Gold.
Sometimes doing nothing is the best form of investment, and that’s pretty much what gold has done for most of the year, standing firm in US dollars or even rising marginally on conversion to Australian dollars.
Over the past few days gold has been one of the few commodities (or currencies) to hold its ground in the face of the uncertainties flowing off the Greek financial crisis, and European instability which has affected most stock and bond markets, including Australia.
More had been expected of gold, given its reputation as a counter-cyclical investment which often performs strongly when other assets classes are in decline.
This time around gold was notable for its lack of movement, either way, a non-performance which still made it a stand-out performer because almost everything else was falling.
On Monday, Greek financial institutions went into lockdown, stock markets such as London plunged by more than 2.5 per cent, and $38 billion was wiped from the value of ASX200 stocks as the local market fell by 2.2 per cent. But the gold price, in US dollars, did not budge on international markets from $US1176 an ounce, and actually rose by $A10/oz in Australia thanks to a slight fall in the local dollar.
That short-term example underlines the point I have been making for much of the year. Investing in gold today is not so much about gaining exposure to a metal which doubles as a currency as an insurance policy against uncertainty, including the potential for a continued fall in the value of Australian dollar.
Gold is one of the world’s ultimate safe haven investments (along with the US dollar and Swiss franc) in troubled times precisely because it is not a currency controlled by a single country, or a commodity controlled by a handful of producers.
While it should never be the sole investment in a portfolio it does fulfil a role as a sheet anchor, generally performing well when everything else is performing badly.
My particular interest in gold this year has been as a counterweight to the declining Australian dollar, a policy I’m sticking to as the Australian economy struggles against the headwinds of low commodity prices and uncertainty about the direction of the country’s major trading partner, China.
The test mechanism for following gold has been a one-ounce bar bought in mid-January when the US dollar price for gold was $US1256/oz and the exchange rate was US82.19 cents, producing a local gold price of $A1528/oz (see Golden moment: It’s time to top up, January 21).
The last time I wrote about my small bar of gold was early in June (see The gold stocks bounce, June 3) when the US gold price had slipped lower, but the Australian dollar had fallen further, delivering a notional profit of $6 – which was still the notional profit when I checked last night at the Australian gold price was $1534/oz.
As someone once said a lot happens and nothing changes.
What makes that $6 profit interesting is not its size, which is certainly not worth writing home about. The real interest is that it is a profit and not a loss at a time when most other forms of investment have delivered losses for investors over the past few months.
Bank shares, a favourite of people running self-managed superannuation funds, have fallen sharply over concern about their ability to maintain their generous dividend payout policies – a concern which is starting to affect the big miners.
Gold equities, like their underlying commodity, have been relatively strong. Newcrest, the local gold sector leader, has added 3c since its Friday close, whereas the resource world’s leader, BHP Billiton, has slipped 54c lower, and Woodside, the oil leader, is down 80c.
For me, however, gold is best in its purest form, as a metal locked away safely in a bank vault, doing nothing but avoiding the routine outbreak of financial disasters.
What happens next is the question worrying every investor given the uncertainties of Greece and Europe, and rising concern about the economic performance of China where a stock-market boom is running out of puff and the government is trying to stimulate activity with a fresh interest rate cut.
Gold, however, is likely to remain immune to what happens on financial and commodity markets, and while tipping a future gold price is a mug’s game it is reasonable to assume that gold will remain a counterweight, offsetting the gloom of global economic uncertainty by running its own its own race.
For Australian investors that means keeping an eye on both the US dollar gold price and the Australian dollar exchange rate because it is the exchange rate which is most likely to have the biggest influence on the local gold price.