JOHANNESBURG - Many market watchers are greatly disappointed with the performance of the gold price, given the global political headlines as gold is seen as a safe-haven. Although we are used to gold being quoted in US dollars the trading in gold is not limited to one currency alone.
Gold should rather be viewed in a basket of currencies to get a clearer picture of the true price of the commodity.
In doing so, the impact of strength or weakness of the greenback on the gold price is largely neutralised.
An equally weighted gold price index consisting of the gold prices in US dollars, euros, British pounds, Swiss francs, Japanese yen, Indian rupees, Chinese renminbi and Turkish lira (therefore in all countries that are major players in the gold market) indicates that the average international price of gold in the second quarter of this year was approaching the previous highs achieved in the fourth quarter of 2012.
In comparison the average gold price in US dollars in the second quarter was more than 20% lower than the highs in the fourth quarter of 2012. The price of gold is undoubtedly investment driven.
Investments include gold bars, gold coins, gold-backed exchange traded funds as well as purchases of gold by central banks. Investment demand for gold is largely event-driven.
The European sovereign debt crisis, which led to a crisis of confidence for European businesses and economies, had the potential for a break-up of the single currency.
It was the catalyst for increased investment demand from 2010 to 2012. The increased demand led to a surge in the gold price over that period.
From 2013 the concerns over the sovereign debt crisis faded and investment demand fell sharply and caused a sharp sell-off in gold.
In the first quarter of last year worries about the outcome of a UK vote to leave the EU led to a spike in investment demand for gold and heralded a new rising phase in the price of gold.
The naysayers of gold are quick to point out the weak jewellery demand for gold in 2016 to the second quarter of this year. However, evidence suggests that the jewellery demand for gold is in fact highly price sensitive.
The strong rise in the gold price at the height of the euro crisis suppressed jewellery demand, while the subsequent drop in the gold price led to increased jewellery demand. It is therefore not unsurprising that the jewellery demand for gold is weak following the strong rise in the gold price.
Complacency
The stretched valuations of global stock markets, especially US markets, and extreme levels of investor complacency, especially in the US, makes global financial markets more risky and vulnerable given the increasingly geopolitical risks.
It is, therefore, not surprising that hedge funds and other investors apparently bought a record 474 tons of gold over the past five weeks on the Comex futures exchange.
Gold-backed exchange-traded funds, which are more popular with long-term funds and retail investors have, however, recorded outflows of 35 tons. The net effect is particularly significant, given that the total gold supply has, since 2010, been 1100 tons per quarter.
“Fear, Mr Bond, takes gold out of circulation and hoards it against the evil day when every tomorrow may be the evil day”- I am Bond, James Bond by Ian Fleming.
Ryk De Klerk is the co-founder of PlexCrown Fund Ratings and is currently a consultant for PlexCrown Fund Ratings.