According to an article authored by Jeff Reeves on September 2, gold (GCZ5, -0.09) now looks riskier than stocks based on the initial assumption that strong volatility and weak demand is weighing on bullion.
We will take a look at both sides of the picture bearing in mind that there are essentially four kinds of investors; the long term, the speculative short term, the get rich quick or risk type looking for a quick killing and a fast buck and finally, the emotional investor.
Reeves makes the assertion that gold, the same as any other asset, is a “good” investment based simply on whether you make money on the trade and how it compares to alternatives. He says that most investors who favor gold, become “emotional” in support of bullion, whenever the subject of gold versus stocks comes into question
Making a case for gold, he says that the metal has been a good swing trade recently as it rebounded from a low of $1,074 an ounce to the mid $1,100s for an approximate 6% gain while the Dow lost about 8% after its worst August in 17 years. Gold certainly has an appeal, says Reeves as a “risk off” trade in the current uncertain world of the stock markets, particularly in the U.S. and even more so in China where the Shanghai Composite lost 12.5% in August.
Gold will remain in favor while the uncertainty around any Federal Reserve decision on interest rates remains, although positive data this week on jobs and wages could end that uncertainty when the Fed meets on 16 - 17 September.
The stock market crash in China, even though it was partly the reason for the surge in the gold price, is ultimately bad news for the precious metal. The lack of demand for gold, both for jewellery and industrial use, as a result of a slowdown in the growth of the Chinese economy, will ultimately push the price down according to Reeves.
There has also been a warning from an economist at Societe Generale of the possibility of a “tidal wave” of deflation following the yuan devaluation if China and connected Asian economies continue to suffer. The low inflation rates and the strong U.S. dollar (DXY, -0.01%) combined, will push the gold price down to its current levels to be 40% lower than the 2011 highs.
Global demand for gold has fallen by some 12% while demand from India alone has dropped by 25%, with gold demand at its lowest since 2009, according to the Gold Fields Mineral Services report for July.
Reeves quotes the charts as showing that there is support for gold in the $950 - $1,000 range, putting the metal below its 200 day moving average and down around 11% lower than its January highs.
He ends by saying if you want risks; stick with stocks - going for those with minimal exposure to Asia while gold is not worth the risk given the sustained downtrend it faces.
Meanwhile, the other side of the picture, according to statistics from the World Gold Council, couldn't be more different.
Until 1971, the gold price was pegged at $35 an ounce, after which market forces determined its value. Since then, gold has easily outperformed stocks and bonds with an appreciation in the gold price of 3,494% while in the same period, the Dow Jones Industrial Average (DJI, +1.82%) has added 1,836%.
Over the last 30 years, the picture changes with the Dow going up by 1,125% while gold increased by 335%, still not a bad investment that grew by more than 10% annually.
Over the last 15 years, gold once again flexed its muscles, increasing by 315% compared to the Dow which went up by only 58% over the same period.
Compared to oil, the other leading global commodity, which lost almost 50% of its value between June 2014 and January 2015, gold is marginally lower and has withstood the attack on commodity prices very well. Whether this means that the gold price will stage a strong recovery remains to be seen, but its stability relative to oil remains a fact to be borne in mind.