Goldman Sachs losing faith in gold
Goldman originally thought gold prices would peak in the middle of 2013 but now believes we have seen the top and the value of bullion will decline to $US1200 ($1140) an ounce over the course of the next few years. This type of movement would effectively end the bull market in gold that kicked off around the turn of the century.
I am the first to admit to having no inkling where the gold price will go, but investors should be aware that holding gold is incredibly risky and not a safe hedge as many would like us to believe.
Gold is different to virtually any other asset class in that it does not give you a yield. It is very much like a religion - either you believe in its value or, like Warren Buffett, you don't. If the investment community woke up tomorrow and decided gold was worth zero, it would hardly create a ripple to the world economy. For now, there are enough people who believe gold is a store of value and will be worth more than many paper currencies in years to come.
Gold's tremendous performance since 2000 can be put down to the turmoil in other financial markets. Originally driven by fear and then by greed, investors moved a portion of their funds into gold and gold-related products such as futures contracts or exchange traded funds (ETF). Instead of holding US dollars and other currencies, such as the yen, investors felt more comfortable with gold even though it offered no economic rent. In other words gold became an alternative currency and when the US started to print money in 2008 a swath of investors made the assumption the greenback would devalue, forcing gold to a record of almost $US2000 an ounce. Today, bullion trades about 20 per cent below its peak.
Big global investors who like gold have made money recently by shorting the yen and buying gold. They would have been better buying the Japanese stock market that has rocketed about 40 per cent higher in just five months. For the average Australian retail investor who only deals in Australian dollars or the greenback, this trade is too foreign and carries enormous risk.
The reality is that most gold bugs have been sidestepped in recent times. Despite the Federal Reserve printing nearly $US3 trillion over the past four years the US dollar still has the ability to appreciate and gold to slide. In fact, given the rally of the greenback, it could be argued the Fed is not printing enough US dollars to meet the growing demand. This is not a positive sign for bullion.
Goldman Sachs reports that despite the underperformance of bullion, the level of ownership of gold futures and gold ETFs remain close to record levels. In other words they believe it is a crowded trade and a slide in the price could turn into an avalanche of selling if the tide turns against the precious metal.
The gold price is a lottery where mum and dad investors must be aware that by holding gold they are playing a high-risk game that many professionals fail to explain. Gold does not deliver a return and there is little practical purpose for the precious metal in the real world. Its value lies with the commonly held belief that it is valuable, rather than any provable economic reason. If that belief dissipates gold could fall significantly. Conversely, if we all start feeling optimistic about gold it could sky rocket. The reality is no one knows because there are no valuation metrics.
China visit
The Prime Minister's diplomatic triumph in China last week will be cold comfort to most Australian businesses trading with the Chinese. It is nice to strike a "new strategic partnership", with the world's most populous country and second-biggest economy, but it will struggle to deliver a single economic benefit to Australia.
China is Australia's largest export market. This will continue until Chinese companies no longer need our product or can source it from somewhere cheaper. The classic example of this is coal. Australia went through a coal boom between 2002 and 2010 as China's demand rose.
More recently, coal prices have sunk as China's demand has softened and cheaper product has emerged from the US. The shale gas boom has seen many US coal producers forced to export coal rather than feed it into the domestic market. This has created an oversupply expected to last for at least another 12 months. Prices are unlikely to recover in this environment.
The fact that we exist in the same hemisphere as the Chinese does not guarantee a rails run. As long as we are not overtly aggressive towards China they will be happy to buy our products if they are priced competitively.
The Prime Minister would be better off putting in place measures that help make Australian industry more competitive in a highly volatile international market. With the Australian dollar hovering about $US1.05 and more than ¥100, most exporting companies are going to continue to feel the pinch no matter how well our government gets on with the new Chinese leadership team.
matthewjkidman@gmail.com
Frequently Asked Questions about this Article…
Goldman Sachs downgraded its gold price outlook due to the precious metal's weak performance during events like the Cyprus crisis and disappointing economic data from the US. They now expect gold to decline to around $1200 USD an ounce over the next few years, signaling an end to the recent bull market.
Gold isn’t necessarily the safe hedge many think it is. It doesn’t generate any yield and its value depends largely on collective belief rather than economic fundamentals, making it a risky investment. Everyday investors should be cautious and understand this risk before diving in.
Unlike stocks or bonds, gold doesn't pay dividends or interest. It’s essentially a non-productive asset, valued mostly as a store of wealth or a hedge during times of financial uncertainty — which means its value is driven by sentiment rather than cash flow.
Gold performed strongly since 2000 mostly because investors sought a safe haven amid turmoil in other financial markets. Fears about currencies like the US dollar triggered a shift towards gold, especially after 2008, when concerns about money printing pushed gold prices close to $2000 USD an ounce.
Not necessarily. Some global gold-related trades involve complex strategies like shorting the yen which may not suit everyday Australian investors who deal mostly with AUD or USD. These trades carry high risks and aren’t always practical for retail investors.
Gold ownership via futures and ETFs is near record levels, meaning many investors are holding on to gold right now. This popularity makes the market crowded — so if prices start falling, there could be a rush to sell, causing a sharp price drop, or an 'avalanche' effect.
Despite nearly $3 trillion printed over recent years, the US dollar has strengthened instead of weakened, which is unusual. This dollar rally puts downward pressure on gold prices because when the dollar is strong, gold tends to be less attractive.
Gold’s value largely depends on investor belief in its worth rather than tangible economic factors. Like a religion, you either believe in gold’s value or you don’t. If that collective belief fades, gold’s price could fall significantly; if it strengthens, gold might surge—making it unpredictable.
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