Why gold is different

The prices of both oil and copper have fallen of late prompted, say some, by fears of a global slowdown. But gold could be about to make its next move up. Why is it such a perennially strong investment?

OPEC continue to say that they can put in a floor for oil at about $60 per barrel, a hard trick considering they control no more than 35-40% of global production. The recent short-term oil weakness underlines the difficulty of their position and further it might be that America is leading the world into a global recession, one which will reduce, in the short-term, the demand for energy. If that turns out to be so, then the bull market for oil isn't over, we will just see a decent pull-back, offering an opportunity in the future to buy back into this multi-generational bull market.

The copper price has weakened whilst other base metals have been stronger. This might be adding fuel to the global slow-down point of view. Copper is often termed Doctor Copper' because of its importance to global economic growth. Here again, the long-term story remains sound, so it's another market to buy when it's lower in the future.

Reasons to invest in gold

Gold is different why? A fuller explanation of this can be found by visiting www.gold-eagle.com and reading the essay entitled "Trivial Pursuit" written by John Hathaway of Tocqueville Asset Management LP. To quote directly some of his words:

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"Gold is precious because it is scarce, compact and impossible to dilute through the mischief of government. Its monetary qualities are conferred, not by government decree but by the acclamation of history. Governments can write gold out of the script of legal tender but are powerless to remove the metal's monetary qualities."

John Hathaway's essay is really worth reading, he does after all run Tocqueville's gold fund. To identify the scale of opportunity this class of investment offers, we quote him further:

"What we can and do know is that, should fear revisit the financial markets, buying power for gold is without precedent. While the gold mining industry struggles to produce 2500 tonnes per year, an amount that would increase the above ground stock of gold by a paltry 1.7%, the financial system continually spews out a blizzard of new financial assets, all of which represent potential claims for liquidity and safety.

In the bleak days of 1935, the market cap of above ground gold equalled 15% of US financial assets. In 1980, when bonds were dubbed certificates of confiscation' (and remember that in 1980 gold was at its all time high of $880/oz our words) and good quality equities traded at 6x earnings and 6% dividend yields, that same percentage was 29%. In today's carefree world, that percentage is only 3%. The price of gold can double or triple in the absence of catastrophic outcomes simply as more investors attempt to position the ETF."

The gold ETF has only been around a couple years. It has provided investors with a simplified route to gold ownership, for every ounce of gold bought via the ETF, HSBC in London have an ounce of gold bullion in store. A gold ETF investment is 100% gold backed.

The gold held in vaults by HSBC in London amounts to 500 tonnes and that figure held steady during the recent 20% gold correction. That is gold in strong hands. Net long futures positions contracted in size by 36% in the third quarter, that was gold leaving weak hands.

Gold is at a turning point - where next?

So where are we now? At a very exciting juncture! A fortnight ago, gold had made its way back above $600/oz, currently it's above $620/oz. That recent move up is, we think, a key technical buy signal. It might well be possible that we are in the early stages of the next big move up.

If fear is about to re-enter the markets and as we mentioned earlier, that seems to be the belief of Hank Paulson, and he really does know what's going on, then gold is going to be one of the few safe havens against deteriorating capital markets and a deteriorating dollar. Those strong hands will look at recent price action as an opportunity to build their positions. We certainly think gold is a buy here and where portfolios are underweight in this asset class, we are remedying that situation. The stars for gold bullion appear to have moved back into alignment, if that is right, it can only get better.

By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.

For more from RHAM, visit https://www.rhasset.co.uk/