Friday, July 8, 2011
Top "Reserve Managers Predicted that Gold Would Be the Best Performing Asset Class Over the Next Year"
The Financial Times notes:
UBS surveyed more than 80 central bank reserve managers, sovereign wealth funds and multilateral institutions with more than $8,000bn in assets at its annual seminar for sovereign institutions last week. The results were not weighted for assets under management.The San Francisco Chronicle noted yesterday that China is still gung ho on the barbarous relic:
Robert Zoellick, president of the World Bank, last year proposed a new monetary system involving a number of major global currencies, including the dollar, euro, yen, pound and renminbi.
The system should also make use of gold, Mr Zoellick added. The results of the UBS poll also point to a growing role for bullion, with 6 per cent of reserve managers surveyed saying the biggest change in their reserves over the next decade would be the addition of more gold. In contrast to previous years, none of the managers surveyed was intending to make significant sales of gold in the next decade.
Central banks have bought about 151 tonnes of gold so far this year, led by Russia and Mexico, according to the World Gold Council, and are on track to make their largest annual purchases of bullion since the collapse in 1971 of the Bretton Woods system, which pegged the value of the dollar to gold.
The reserve managers predicted that gold would be the best performing asset class over the next year, citing sovereign defaults as the chief risk to the global economy.
The yellow metal has risen 19.5 per cent in the past year to trade at about $1,500 a troy ounce on Monday, buoyed by the emergence of sovereign debt concerns in the US as well as eurozone debt woes.
China's asset managers, who have been approved to raise $70 billion for allocation overseas, are seeking additional funds to invest in gold and precious metals as soaring inflation spurs interest in alternative assets as a way to protect wealth.Martin Hutchinson argues that gold will do well until the 2012 election, as Bernanke and the administration will keep rates low and monetary policy loose. But sometime after the election, and perhaps when Bernanke is replaced, rates will be raised dramatically, and it will be time to sell gold.
Gold demand in China, the world's largest producer, is expected to continue rising as economic growth boosts wealth and inflation rising at the fastest pace in almost three years drives demand for alternative assets. Investment demand more than doubled in the first quarter to 90.9 metric tons as the nation overtook India to become the largest market for coins and bars, the World Gold Council said in May.
If those of us who say that gold is not in a bubble are right, then why are most investment advisers so anti-gold?
McAvlany Wealth Management gives an interesting possible answer:
Of course, a less charitable explanation might be that investment advisers to the little guy don't make money by suggesting physical metals ... they make money by churning stocks.
Each bull market of the past 100 years has shared similar characteristics. We’ve often explored the distinct periods within a growth trend, and parsed this out by investor psychology and degree of confidence. We’ve said that there are three distinct phases from beginning to end, beginning with the maverick investor and ending with the masses chasing a momentum trend. We observed one more sign this week of being on the cusp of the third and most explosive growth phase. (You won’t want to sit this one out.)
In the early 1970s, it was a common Wall Street view to see gold as a fringe asset, determined by rational minds in the ’30s to be irrelevant to “modern” investment portfolio allocation. However, by the mid 1970s, as the price dynamics argued annoyingly for a full-fledged bull market, many on Wall Street changed from being dismissive to confidently cautious; cautioning that it had in fact already moved too high in price to be of interest to serious-minded investors. Resistance to the idea was common. (Owning gold is unsettling for a crowd whose job security is determined by “good times.” As Joseph Schumpeter has said, “The modern mind dislikes gold because it blurts out unpleasant truths.”) Once this stonewalling had finally been worn out by the repeated requests of clients seeking to purchase metals against the advice of their brokers, real money began to migrate to the asset class (real world inflation was being felt up and down the socio-economic ladder), and Wall Street no longer had an excuse to be out – they had to be in.
Between ’76 and ’78, analysts began to wrap their minds around the metals market, favoring gold stocks over physical metals (you can look at a balance sheet and even go out and meet the management of the company instead of analyzing warehouse inventories, bar weights, and serial numbers). Analysts first observed that well-run gold companies had earnings that were leveraged to the rising price of the commodity. Earnings growth expectations defined the initial (albeit late) Wall Street infatuation with gold. (We have yet to see this during the current bull market because everyone assumes the price is going lower from this point, not higher, and thus the imagination has not yet been set free – or feverishly on fire.)
Once the imagination was unrestricted by past prejudice and the Wall Street crowd was making a little money in the gold trade, valuations (at that even later stage) shifted and became more aggressive by relating a company’s value to its in-ground ounces. What was the value of a company that had a bazillion ounces available to it, even if it was just a nominal producer today? For anyone that had missed buying the metal at $125.00 an ounce, you could still buy a company with in-ground ounces at that older and more attractive price. You can count reserves; you can even stretch that method and count inferred resources to yield an even higher valuation for the company – or justification for a higher share price.
Fast forward to this week’s Barron’s magazine. David Steinberg, as asset manager out of Illinois, shared in an interview that buying gold companies was a way of buying gold under the current market price. Sounds attractive. It is even partially true. Importantly, it is the first such observation we’ve seen in the mainstream media. We are sure it won’t be the last. The trickle of public interest in the U.S. will become a flood. Conservative metrics will once again become aggressive.
The migration of money has always followed this general pattern from maverick investor to mass mania. We are still far from the point of mania, and the final push higher by momentum investors. However, as we frequently discuss a myriad of issues spanning economics to geopolitics we are closer by the day to a cusp event marking the departure of the middle stage of this bull market taking us into the final stretch.
For a background on price trends in gold, start here.
Note: I am not an investment adviser, and this should not be taken as investment advice.