Gold is just rebounding from the Q3 setback. But what exactly was happening, or will happen to gold, the near-3 trillion dollar industry?
Q2, we have seen temporary easing of physical demand (jewelery market) and very unusual volatility for gold, prices ranging from $567 to $725. This high volatility has not been seen since the mid-80s, and is unlikely to continue as gold is historically not a volatile metal due to ample near-market supply.
Gold's correlation with other instruments: not highly correlated, particularly with equities. This is one of the best investment attributes of gold, a great diversification tool for modern portfolio theory.
Out of the 7 gold ETFs, I'm a fan of IAU because of iShares' other products (no I do have a professional relationship with iShares or Barclays). It's up 32% YTD, vs 30%- for spot gold and 10%- for S&P 500. Here's performance of IAU over past 18 months:
Gold forecast survey by analysts from bulge-brackets and specialty boutiques. As seen here, gold is still outperforming analyst expectations no matter how bad Q3 was:
Also, there was a significant decline in investment holdings of index-linked commodity futures. June's total global assets in commodity benchmarked investments were $120 billion. By October, it has declined to $90 billion. The decline was not only due to the price drop of major commodities, but also "grass is greener elsewhere", particularly equities.
What's happening in the future? Jewelery accounts for 77% of demand for gold since 2001, and the long term outlook is positive due to rising consumer income, purchase power, favorable demographics (women/seniors) and attitude changes in developing countries. Industrial demands (11%) are also likely to rise since next generation electronics and consumer goods use gold as raw materials.
When comes to supplies, mining (62% of total supplies) activities continue to suffer. It takes 10 years to open a new mine and god knows how many for earth to supply us with new gold. Lowering supplies will cause prices to increase, and increasing prices will stop producers from selling gold forward, or even buying back previously hedged positions.
Long story short: I'm bullish on gold.
Sources: LMBA, World Gold Council, SeekingAlpha, Global Insight, Bloomberg
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Very detailed. Good info on gold!
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