Is the golden age coming to an end?
'Some of the mugs have taken extreme bets on a falling gold price," says one precious metal retailer. "Never have the money managers become so convinced that gold is about to fall heavily."
It could actually mean that the gold price is about to rise strongly "as they must buy back these positions", he argues. So runs the logic among those with a tendency to dangle every piece of news, good or bad, in front of customers as an incentive to buy the precious metal.
Still, even the most bullish gold investors would have to admit that now may not be the best time to be buying the metal, as economic optimism in the US rises and concerns about the eurozone recede.
Speculation that the US Federal Reserve might scale back its monetary easing efforts earlier than expected have further weakened demand for the "safe-haven" metal.
The gold price is now down 5 per cent this year to $US1582 an ounce. Talk among investors is that this year may mark the end of its spectacular 12-year bull run.
More people are moving to the camp of Warren Buffett, the investor behind the Berkshire Hathaway conglomerate, who has long shunned gold.
"You can fondle it, you can polish it, you can stare at it," he once told shareholders. "I'd bet on a good producing business to outperform something that doesn't do anything." It is a sentiment becoming increasingly evident as investors pile into the sharemarket.
Wall Street set a fresh record on Friday, with the Dow Jones topping the 14,410-mark, following better than expected jobs figures. In London, the FTSE 100 closed at 6483.58, its highest since December 2007.
Not all are convinced by the strength of the rally. Jeremy Grantham, the investment manager who takes a dim view of the US's economic prospects, warned in his latest circular that many assets are "once again brutally overpriced".
The research team at Grantham's $US106 billion GMO fund has ranked timber as the No.1 asset class for expected returns over the next seven years.
One investor keeping the faith amid all this is John Paulson, the hedge fund manager who became a billionaire by betting against subprime mortgages before the financial crisis swept the world.
His gold fund, which holds about $US800 million of equities and derivatives related to the metal, is down 25 per cent this year. With Paulson's own money thought to account for at least half the fund, he has major personal exposure.
Stick with us, his investors were urged in a letter last week. "Despite the volatility and drawdown of our gold equity positions, we believe in the long-term outlook for these positions as quantitative easing programs continue around the world, credit expands in the United States, and gold equities continue to trade at a significant discount," it read.
In contrast, another billionaire investor, George Soros, has been reducing his exposure to gold. Two years ago, Soros called gold "the ultimate asset bubble". He now sees the risk of it bursting, it seems.
The gold price is volatile, with everything from hints of central bank easing to changing jewellery demand in India, shifting the price.
As sentiment has turned more bearish, a note from Goldman Sachs grabbed attention. The bank cut its forecast for the gold price this year to $US1600 an ounce from $US1810, and predicted that next year the price will be $US1450.
"The turn in the gold cycle has likely already started," the bank warned, pointing to "a quickly waning conviction in holding gold positions".
But there is no consensus. Bank of America Merrill Lynch expects gold prices to rise strongly next year to an average of $US1838 an ounce, although it sees prices turning lower in 2015.
Capital Economics, the UK consultancy, says gold will reach a record $US2000 later this year, warning that the eurozone will flare up again and the rally in equity markets may run out of steam.
If the price rises, investors would soon be heading back in, argues Ross Strachan, Capital's commodities analyst. But he notes: "There is an inherent difficulty in valuing gold - it's much trickier than for almost any asset you care to name."
Frequently Asked Questions about this Article…
The article says gold is down about 5% this year to roughly US$1,582 an ounce and some investors are talking about the possible end of a 12‑year bull run. Opinions differ widely, so while the price has pulled back, analysts and investors disagree on whether the long rally is finished.
Investors are divided because some see economic optimism in the US and fading eurozone fears reducing demand for gold as a safe haven, while others point to heavy short positions that might be covered (forcing buybacks) and ongoing quantitative easing worldwide. That mix of macro signals and market positioning creates very different views on buying gold.
Speculation that the US Federal Reserve could scale back monetary easing has weakened demand for gold, since less easing tends to reduce safe‑haven flows. Conversely, hints of central bank easing or continued quantitative easing in other regions can support gold prices, so central bank policy is a key driver of gold volatility.
There is no consensus. Goldman Sachs cut its forecast to US$1,600 an ounce this year (from US$1,810) and predicted US$1,450 next year. Bank of America Merrill Lynch expects a strong rise to an average of US$1,838 next year, while Capital Economics has a much more bullish view, saying gold could reach a record US$2,000 later this year.
Positions vary: John Paulson remains heavily invested in gold—his gold fund (about US$800 million in related equities and derivatives) was down about 25% this year and he reportedly has large personal exposure. By contrast, George Soros has been reducing his gold exposure and previously warned gold was an 'ultimate asset bubble.'
The article highlights contrasting views rather than a single recommendation: some investors (like Warren Buffett) prefer productive businesses over gold, and equity markets were hitting records, while others still back gold because of potential macro risks. Everyday investors should weigh their own risk tolerance, time horizon and diversification needs rather than rely on one signal.
Gold’s price reacts to many shifting factors—central bank policy and quantitative easing, investor sentiment and positioning, and demand changes such as jewellery buying in India. The article quotes analysts saying valuing gold is intrinsically tricky compared with most assets, which contributes to its volatility.
Yes. The article notes some money managers have taken large bets that gold will fall. If those positions are forced to be covered, the resulting buybacks could push the gold price sharply higher, so heavy short positioning is a potential trigger for rapid reversals.
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