Author: David Levenstein, Johannesburg
Commentary: John Fisher
Many market commentators argue that investing in gold is a waste of time especially since it does not pay interest and remains inert. This statement is very misleading. The issue of interest has no relevance. No one has ever invested in gold in order to receive interest. While gold is a precious metal as well as being a form of global currency, it is also a commodity. And, the reason why investors buy commodities is not for an annual dividend payment, but for a return on their investment that occurs as the price of the commodity appreciates. (I have not heard analysts say don’t buy corn because it doesn’t pay an interest). And, in many instances this rate of appreciation can be truly spectacular giving investors massive returns.
It should also be noted that gold is unique as an asset class as its value is influenced by many factors. And, like other asset classes, the price does not go up in a straight line. What amazes me is when gold goes through periods of consolidation certain analysts immediately denigrate it as an investment. Yes, there are going to be times when other forms of investments will out perform gold, but as the major trend in gold still remains firmly upwards, we must not allow these short-term periods to cloud our long-term judgment.
Like central banks that hold a portion of their reserves in gold, individual investors should do the same and allocate a portion of their funds to this precious metal. In fact, practically most countries hold a portion of their reserves in gold. All developed countries hold gold in their reserves while most of the developing countries also have a small holding of the yellow metal. As at the end of February 2010, some one hundred countries held gold in their reserves.
According to the World Gold Council (WGC), central banks added the most gold to their reserves since 1964 last year amid the longest rally in bullion prices in at least nine decades. Combined holdings rose 425.4 metric tons to 30,116.9 tons, an increase worth $13.3 billion at last year’s average price, according to the (WGC). India, Russia and China said last year they added to reserves. The expansion was the first since 1988. Central banks, holding about 18 percent of all gold ever mined, are expanding their holdings for the first time in a generation as investors in exchange-traded funds amass bullion as an alternative to currencies. Holdings in the SPDR Gold Trust, the biggest ETF backed by the metal, are at 1,115.5 tons, more than the holdings of Switzerland.
Many of these central banks also hold currencies and US Treasuries in their reserves. But, what has been interesting is recently, some of these countries have been reducing their holdings of their US Treasuries while they have added to their gold holdings.
Last Monday, the US Treasury Department said that China’s holdings dipped by $5.8 billion to $889 billion in January compared to December. Japan, the second largest foreign holder of U.S. government debt, also trimmed its holdings but by a much smaller $300 million to $765.4 billion. A month ago, Treasury initially reported that China had cut its holdings so sharply that it had lost its top spot as America’s largest foreign creditor, a position it had held since its holdings overtook Japan in September 2008. However, 10 days later, Treasury released its annual update of the figures. The revised data showed that China, while reducing its holdings, still retained the top spot.
While China and Japan decreased their holdings, oil exporting countries boosted their holdings to $218.4 billion, up from $207.4 billion in December, and holdings of Treasury securities in Great Britain rose to $206 billion, up from $178.1 billion.
Economists say that unless foreign demand for U.S. Treasury debt remains strong the interest rates that the government has to pay for that debt could rise sharply, making the U.S. deficit picture look even worse. Rising rates for government debt would also put upward pressure on private debt, sending borrowing costs up for U.S. businesses and consumers adding another risk to the U.S. economy as it struggles to emerge from the worst recession since the 1930s.
Last week the Euro remained under pressure especially after Mr. Papandreou, the Prime Minister of Greece, basically threatened the EU and warned that if Greece could not sell its bonds and the EU would not come to his rescue, they may have to go to the International Monetary Fund and get some help. So the saga of Greece’s debt problems continues. During the week, sterling rebounded strongly on the back of the stronger than expected job market data. The Dollar index dropped further to as low as 79.52 which represents a 38.2% retracement of 76.60 to 81.34.
All Things Considered – John’s Commentary:
As noted above, when gold and silver trade sideways and go through periods of consolidation many analysts immediately denigrate them as an investment. At the same time, when Microsoft, Exxon or Apple trade sideways, they call it a period of consolidation.
While the primary trend for gold remains strongly intact and to the upside, the current period of consolidation between $1,140 and $1,100 is frustrating investors. It is important to be patient and to not be deterred, even if gold dips to the $1,080 or even $1,045 level. These would be great buying opportunities. Remember that sideways movement offers many buy/sell opportunities.
What to buy now: Stick to the basics and lowest premiums. In gold: 1-oz. Krugerrands, American Arts Medallions and 100 Coronas. In silver: 90% silver coin, generic 1-oz. silver rounds and 100 oz. bars. Keep it simple!
