Investors continue to pile into gold due to concerns about sovereign debt issues and large government deficits.
Last week, gold rose to a record in London and New York as investors sought an alternative to currencies amid mounting concerns over Europe's debt crisis. Once again, I am being asked if it is too late to buy gold. And, my answer is, "absolutely not!"
I remember being asked this question when gold broke through USD 500/oz, then USD700/oz and then USD1000/oz. Gold, is up 14 percent this year and the yellow metal is heading for its 10th consecutive annual gain, the longest winning streak since at least 1920. Gold has outperformed other main precious and industrial metals. Holdings in exchange-traded funds backed by gold reached records the past month, while coin sales from mints accelerated.
It seems that there are too many market commentators who continue to denigrate gold as an investment as they don't really understand the dynamics driving the gold price, and who still can't understand why someone would want to invest in a metal that does not pay any interest. Frankly, I am so tired of hearing such comments. There are many reasons why people invest in gold and interest has never been one of them. Here are some of the reasons why people invest in gold. It has been proven to be an effective way to preserve wealth. It is a hedge against the declining values of currencies as well as a hedge against inflation. It is also a safe haven asset in times of geo-political instability and it is an excellent store of value. And, while there are many factors influencing the price, the main driving force behind the price is the global currency crisis and the potential threat that all the major currencies are facing further massive devaluations.
Right now as we see governments debase their currencies by printing more and more money, gold is fulfilling its traditional role as a hedge against the declining values of currencies. And, with huge sovereign debt as well as massive budget deficits in most industrialized countries, this problem is not going to be solved over night nor is it going to be solved with a series of austerity measures. While this is a start, this is not the cure. There is just too much debt relative to the size of the economies.
Even if we disregard the currency crisis, the price of gold is still relatively undervalued. On an inflation-adjusted basis from its previous high in 1980, gdefault: January 2010old should be trading closer to US$2300/oz
Over the last few weeks we have witnessed some extraordinary demand for gold. According to an article published by Bloomberg on June 09, the demand for gold coins is tightening supplies and boosting premiums as mounting concern over Europe's debt crisis spur purchases. European buyers accounted for 69 percent of purchases last month, compared with 51 percent a year ago, according to the Perth Mint. Rand Refinery said output at the end of May jumped 50 percent to 30,000 ounces of blank coins for minting, the highest weekly production since 1985. Demand was strong enough to constitute "panic buying," Muenze Oesterreich AG, the Austrian mint that makes the Philharmonic coin, said on May 12.
In an interview with Geoff Candy from Mineweb.com Bernhard Schnellmann, director for Precious Metals Services at the refiner Argor-Heraeus said that according to his figures the demand for gold products is around ten to twelve times more than at the beginning of this year. "I think especially people here in the Eurozone are maybe a little bit scared. Don't forget Europe has a very shaky experience with all its currencies and the euro itself was a kind of hope and now with the pressure on the euro it is maybe even more scary than if people would still have – I don't know the lira, franc or what they're used to…" Schnellmann said.
"You do need to own more gold and silver as a consequence of the prospect of more quantitative easing from the U.S. in the third and fourth quarter this year," Philip Manduca, head of investment at ECU Group Plc, said on June 8, in a video message to Bloomberg News. "It's why gold's making new life-time highs right now."
Holdings in the biggest gold exchange traded fund (ETF) the US (GLD), has gained 13 percent this year. The fund's assets now hold 1306.137 tons (41, 993, 616 ounces). This is an increase of around 38 tons since the end of May, and an increase of 175 tons since the end of 2009. To put this in perspective, if we compare the US (GLD) with the South African (GLD), in only two months, the US (GLD) added some 147 tons to its holdings which is almost 3 times what the South African (GLD) has accumulated since it began in October 2006. The US GLD is now the sixth largest holder of gold in the world after the central banks of Germany, Italy, France, the IMF and the US.
Both the medium and long-term moving averages are trending upwards indicating a firm up trend for the yellow metal. However, there is resistance at US$1240/oz and US$1250/oz levels. For the short-term the price remains in an upward bias.
About the author
David Levenstein is a leading expert on investing in precious metals .He brings over 30 years experience in futures, equities, forex and bullion. And, although he began trading silver through the LME in 1980, when it comes to gold, he has traded gold bullion, gold coins, gold shares, gold ETF, gold funds and gold futures for his personal account as well as for clients. Over the years, David has been published in dozens of publications and has appeared on SABC 3, CNBC and Summit TV (South Africa), and is a regular guest on JSE Direct, a premier radio business channel in Johannesburg, South Africa. He is also a regular commentator on www.kitco.com, www.mineweb.com, www.gold-eagle.com, and www.infomine.com David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
For more information go to: www.lakeshoretrading.co.za
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.