The new trading week started off on a downbeat note in commodities, equities, and a certain crisis-beset currency across the Atlantic. Risk assets headed lower on a combination of anxieties surrounding global economic expansion (the inverse thereof to be specific), and persistent systemic troubles in the eurozone and China.
The spot price of gold fell by more than $11 to touch $1,578 per ounce while silver shed 51 cents to reach a bid-side quote at $26.87 the ounce. Friday’s Market Oracle posting by Joe Russo summed up gold’s current paradigm as plainly as can be, and as follows: “At present, gold continues to render lower lows and lower highs, confirming its downtrend of the past 10-months.”
Platinum dropped by $18 and palladium declined $8 with quotes coming in at $1,410 and at $576 respectively. Citigroup analysts have downgraded their 2012 and 2013 price projections for platinum and for palladium this morning. The bank scaled back its palladium average price forecast by 18% to $659 for the current year and by 24% (to $700) for next year.
The weekend did not bring much in the way of positive physical gold offtake reports from India. As regards that country’s gold demand for the current year, the World Gold Council finally realized that domestic troubles (uncertainty, deficits, poor monsoons) and active efforts by the government to curb bullion intake will translate into a second year of such demand falling.
As regards the current year, the semi-annual snapshot of various top investment ideas (usually concocted at the start of the new calendar) reveals that a) gold has been volatile and that b) gold price-tracking investment vehicles are “essentially flat” while gold mining shares have once again (surprise!) been slammed (down 19% YTD). Marketwatch notes that “weak global growth is dragging on gold prices. India and China are among the world’s largest gold buyers and the slowdowns in those major economies have taken a toll on precious metals.”
A very timely paper titled “The Golden Dilemma” published on June 7 by commodities expert Claude Erb and by Duke University Prof. Campbell Harvey (he also of the National Bureau of Economic Research) addresses certain “age-old” questions that continue to dog the minds of the average investor. Namely, “Do I seek inflation protection by paying a high real gold price that almost guarantees a decline in future purchasing power? Do I avoid gold and run the risk of a decline in future purchasing power if inflation surges?”
The authors set out to try to better understand the treatment that gold ought to receive when it comes to portfolio allocations. They examined a host of “popular stories” that are commonly employed to make a pro-gold argument. You know; inflation hedging, currency hedging, and disaster protection. By delving into the facts-and-figures-based reality in gold over a long timeframe, the authors manage to debunk such “conventional wisdom” line by line, in devastating fashion.
First of all, they assert, it is not plausible to expect that the real rate of return in the long-run for gold could be 13% per annum, as it has been from 12/1999 to 3/2012 (more like 15.4% actually, minus a 2.5% annualized rate of inflation). Second, the authors caution, “given the most recent value for the CPI index, this version of the “gold as an inflation hedge” argument suggests that the price of gold should currently be around $780 an ounce.” They also remind the reader that the only other time that the real price of gold was as high as it is currently, was back in 1980 and that periods when such real prices are above average are followed by extended periods of time when they are to experience returns below average.