Golden moment: It's time to top up
Summary: It's time again to consider gold, with the ASX gold index and some gold stocks rising in the first few weeks of the year. A series of events are boosting gold's appeal, including fears around Europe, the spike in the Swiss franc, continued economic uncertainty and a cut to gold mine operating costs as the oil price plunge falls. |
Key take-out: For an Australian investor, exposure to gold provides exposure to international events, as well as a hedge against a falling Australian dollar. |
Key beneficiaries: General investors. Category: Gold. |
If gold is not back on your radar screen it ought to be as the local price marches steadily higher thanks to the rising US dollar price of the metal and the continued slide of the Australian dollar.
Together, the financial pincer of currency moves and demand for safe haven investments pushed the local gold price to $A1581 an ounce overnight, taking its rise over the past three weeks to 8.2%.
The Australian stock exchange gold index has done much better than that, rising by 23.5% since trading started on January 2, a spectacular performance compared with a 2% fall in the All Ordinaries over the same period.
Newcrest, the gold sector leader, hit a 12-month share price high on Monday of $13.33 taking its rise this year to $2.53, or 23.4% – a percentage which neatly matches the gold index and demonstrates the dominance of Newcrest in the Australian gold sector.
Other stocks have done better than the leader. Northern Star has risen by 38% since the start of the year and has also just set a fresh 12-month high of $2.07. St Barbara, one of the gold stocks hit hardest by the sector-wide sell-off over the past three years, is up by 72%, though that impressive move is magnified by its rise off a low base.
The point about what's happening in gold is that analysed in any way you like it is moving higher as a series of events bolster its appeal, including:
- The ongoing financial crisis in Europe which is expected to trigger a fresh round of money printing (quantitative easing, or QE) by the European Central Bank as early as tomorrow.
- Fear that conditions in Europe will deteriorate further after a national election in Greece on Sunday which could be a precursor to a Greek exit (the so-called “Grexit”) from the euro monetary system and possibly the European Union.
- Last week's pre-emptive strike against the ECB by the Swiss National Bank which broke a three-year peg linking the Swiss franc to the euro.
- The Swiss action drove the value of the franc up sharply, effectively making one of the world's safe haven investments more expensive, especially for Europeans who also found that a deposit in Switzerland comes with a negative interest rate which has been raised from minus 0.25% to minus 0.75%.
- Switzerland's decisive action triggered widespread dislocation in foreign exchange markets and heightened interest in gold – while it might not pay interest when held in its physical form it is no more expensive than a Swiss bank deposit.
- Last week's events saw investors pile into exchange-traded gold funds with the world's biggest, the SPDR fund, rising at its fastest rate in five years with gold held in the fund increasing by 1.9% on Friday alone to 730.89 tonnes.
- Continued economic uncertainty, including the latest World Bank global growth downgrade, hurting most forms of investment while boosting the case for gold which thrives in a crisis.
- The oil price plunge, which has cut gold mine operating costs, especially in open pit operations, by as much as 12% by lowering the price of diesel and other fuel.
In Australia, there is the added issue of the fall in the value of the local dollar and an expectation that the widespread collapse in the prices of industrial commodities such as iron ore and coal will cause further deterioration in the value of the dollar.
Last week, to test the theory that the combination of international and local events would push the local gold price higher I put a small amount of skin in the game with the purchase of a one-ounce bar of gold at the Perth Mint.
It was a less expensive experiment than one undertaken in late 2007 when gold was added to my pension plan as the first storm clouds gathered ahead of the global financial crisis.
This time, the object is to use the one-ounce bar as a tracking tool which integrates US dollar gold price movement and Australian dollar currency movement.
So far, so good.
The purchase price on Friday, including Mint charges of around $47, was $A1575. It was a day when other investors were piling into the SPDR fund and the US gold price was $US1256/oz, and the exchange rate was US82.19c which produced a notional local gold price of $A1528/oz.
Last night the US gold price rose to $US1293/oz and the dollar slipped to US81.74c to produce an Australian gold price of $1581/oz – which means the experimental bar is now $6 up on its Friday purchase price, and has paid for the Mint charges.
What happens next is the interesting bit because Europe's launch of a QE program, which could see an extra €1 trillion pumped into the region's economy, should also be seen as a further debasement of the underlying value of the euro, which is one of its aims.
Like earlier moves in the US, Japan and China, the money-printing and other government stimulus have been aimed at boosting economic activity and to fight deflation which central banks regard as a worse enemy than inflation.
Seven years ago, when the US central bank said it would launch a QE program, the gold price reacted positively. In theory, a European QE program could have a similar effect, while also increasing the level of financial market volatility – which gold loves.
The problem faced by central bankers is that achieving the right mix of monetary and economic stimulus is proving hard to achieve, as shown in the latest global growth downgrade by the World Bank.
Speculation late last year that the ECB would be forced to launch a QE program can possibly be seen in the gold price which hit a multi-year low of $US1142/oz on November 5, reaching a five-month high overnight of $US1293/oz.
After nearly eight years of monetary manipulation, and ultra-low interest rates, investors are finding it hard to identify investment safe havens with gold one of the last available.
While global events are pushing the US dollar gold price higher, the local gold price is being further boosted by weakness in the Australian dollar (see Golden moment! Where mining money will be made this year, January 14, 2015).
The twin forces of international and national pressures led me back into a modest gold experiment, albeit with an early surprise.
It's the rise in the US dollar gold price which has been the major factor in boosting the local value of gold, not the falling dollar, yet.
Since last Friday the US gold price has risen by $US37/oz, while the Australian dollar has slipped modestly, from US82.19c to US81.74c.
No-one knows that will happen next, but for an Australian investor exposure to gold means exposure to international events, while also providing a hedge against the widespread expectation of further weakness in the Australian economy and its currency.
Both of those factors will be reflected in the gold price.