15 March 2010

Golden Wonders

Gold is a conundrum lately. We've held the yellow metal in varying degrees within our client portfolios since it was priced at less than $300 per oz. Thanks to some judicious increasing and decreasing of our exposures and opportunistic allocation between bullion, derivatives and gold equities, we've managed to achieve excellent added attribution from our gold exposures. But lately it's been troubling us. Our portfolios reduced gold exposure back in November at $ 1100 per oz because gold has been behaving like a risk asset. Long term the problems inherent in all major currencies provide a frame for comments by MBMG's portfolio co-advisor, Martin Gray, that gold should be seen as an alternative currency and one that has far less problems than the majors. Short term that should also be tempered with Martin's view that "I wouldn't chase gold at current prices" and that he's still looking for significant pullbacks as buying opportunities.
 
So long term attractive but short term, possibly overpriced? We asked MBMG's commodity advisor, Jeremy Charlesworth to update the gold outlook that he gave us when he visited Bangkok in January:

"Many of us believe Gold will reach much higher levels in the years ahead. When Gold takes off Jewellery demand and industrial demand (which is pretty small at the best of times) will become totally irrelevant.  It will all be about investment demand and central bank buying.  (The Central Banks doing the buying will be those far away from the credit issues).
 
If John Sheehan's scenario wins the day then, at some point, those who are predicting $10,000 Gold may be proved right.  My guess is not quite as apocalyptic but we will have Gold rising year on year with sharp setbacks along the way - maybe $3000 one day but not this year.
 
The early warning signs will be a collapse in currency values, each dodgy currency being taken down one by one and then eventually the USD will be under attack. 
When and if that happens then we will see Gold rising by $300 to $500 a day for several days!"

We agree. Frankly anything could happen but if you held a gun to our heads we'd hope for some kind of benign 'normality' for the next few months. Then a significant downward pressure on asset prices (including gold) is likely to co-incide with a rally in the Dollar. Timing is impossible to guess but H2 10 seems to be the best bet. At the end of this a major weakening in the Dollar is likely to play out with gold being the major beneficiary and Asian currencies also doing well.
 
But 2010 is the year when anything not only can happen but at some stage it probably will and strategies shouldn't be built around long term predictions. There's a high chance that at least one part of that story won't go to plan and portfolios have to be ready for if and when that happens. Whatever the asset class, be light on your feet.