Investment in Gold: Test for Strength

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“No one understands gold,” said Nathan Rothschild, a representative of the famous dynasty of bankers, once.

If you try to summarize the opinions of the most authoritative representatives of the financial community, Rothschild’s correctness becomes obvious – any discussion about gold turns into a real battle. 

Some say that gold is an unnecessary material, suitable only for ladies’ trinkets. That is why the gold bugs investing in this “despicable” metal are either simply ignorant or unsuccessful speculators pushing themselves and their clients to the brink of the abyss. In response, you can hear that gold is the only and omnipotent, thanks to which you can preserve your capital, despite any cataclysms.

Before starting to present the arguments of both sides, a brief historical background. Fourteen years ago, on April 2, 2001, gold prices fell to $ 255.3 per troy ounce, reaching their bottom, after which gold rose in price for a whole decade. Such dynamics was not observed for any other asset in the financial market!

In 2011, gold broke the $ 1,900 per ounce mark, and it seemed that the landmark $ 2,000 were the reality of the coming months, but then it also began to fall in price sharply. Optimists called this collapse a correction, while pessimists called it a return to real value. Today the price is at the level of five years ago. “But that is not all! – the apologists of gloomy forecasts gloomily exclaim. – This is just the beginning! You have not yet seen what a real rockfall is! “

The stones are not accidental. The Wall Street Journal simply called the precious metal … cobblestone. An article titled “Let’s Be Honest About Gold: It’s a Cobblestone in a Cardboard Box” tries to convince the reader that gold is essentially no longer a safe haven and is no longer a cure for inflation. “Remember,” the author of the article exclaims, “when the crisis in Greece reached its climax, the euro fell against the dollar, the Chinese stock market stopped, gold sat still like a stone in a box! So maybe the owners of gold assets bought them in the last ten or thirteen years by mistake? “

The headline of another article, already from The Washington Post, speaks for itself – “Gold is doomed.” Bloomberg comes out with approximately a similar forecast – “Gold will only show deterioration.” According to analysts of the agency, by the beginning of next year, gold prices will fall to $ 984 per ounce, and this will be the strongest fall in the past six years. “Gold has gone out of fashion like flared trousers: nobody wants to buy it,” said Robin Bar, an analyst at Societe Generale SA in London. “It will not collapse, but we think it will be low in the near future.”

“Gold is not a commodity for which there is fundamental demand,” says colleague Brian Barish, CEO of Cambiar Investors LLC. – It is beautiful, so people use it in jewelry. But it is different from iron ore, oil, copper, or grain. It has no specific end use. “

The price of $ 984 is, of course, not enough, but it is not the bottom at all. In an article on MarketWatch, Claude Erba, who was a commodity manager for the TCW Group, states that the fair price for gold today is $ 825. “But,” says Erba, “whenever gold drops to fair value, it misses and falls well below those levels, just remember the mid-1970s and late 1990s.” Therefore, the bottom, according to the analyst, will be somewhere at $ 350 per ounce. This opinion may be worth listening to, since Erba, along with Professor Campbell Harvey of Duke University, accurately predicted a long-term bear market in gold when it was just beginning.

Above are the opinions of those who, in the fight between bears and bulls, are on the side of the former. But, naturally, there are adherents of the latter, otherwise this struggle would not have existed. For example, Jeffrey Gunlach, fund manager of DoubleLine, believes that gold could bounce to $ 1,400 an ounce. One of the main reasons for this, in his opinion, is the negative yield on a number of European bonds, which is a kind of deflationary signal lamp and makes gold more attractive. “Indeed, the moment is now bearish,” says Jeffrey Nichols, senior economic adviser at Rosland Capital. At the same time, while agreeing with Gunlach, he believes that gold should eventually bounce back. “It’s just a matter of time before gold regains its position,” says Nichols.

Michael Kuggino, the manager of the Permanent Portfolio fund, supports this reasoning: “Over time, gold prices will rise as Russia, China, India and central banks of other countries seek to diversify their portfolios.” Kuggino also admitted that gold prices will still experience strong fluctuations for the foreseeable future. However, he himself transferred about 20% of the fund’s assets to gold as a hedge against inflation and market volatility.

Also on the side of the bulls is Hintan Karnani, chief market analyst at Insignia Consultants. In his opinion, from July 2016, gold will begin to move in a stable bullish trend, and the price for it in the period from June to November 2016 will cross the $ 1,700 mark. Until then, “investors should have patience and should not be intimidated to see the price fall.”

So where will the price move? “In my opinion,” says John Gordon, a leading analyst at the international brokerage company NordFX , “when making any financial forecast, it is a mistake to focus on only one or two factors, even if they are very important. As practice shows, in reality everything turns out to be much more complicated. And the price of gold is no exception.

I would note seven global factors, the interaction of which forms the value of this metal – inflation, interest rates, the situation on the stock markets, the geopolitical situation, the weakening or strengthening of the dollar, oil prices and demand for gold in Asian countries.

A change in any of these parameters can upset the equilibrium of this multifactorial system, as a result of which the total vector, or trend, will change its direction. Therefore, I would advise investors who gravitate towards gold to at least somewhat diversify risks and invest part of their funds in shares of gold mining companies and reputable investment funds that are able to more flexibly respond to changes in market conditions. “

At the end of the article, one cannot but cite one more – sensational – opinion. Avi Gilburt, Managing Director of Gilburt Financial Services and Wave Analysis Specialist, claims that in the foreseeable future gold will rise to … $ 25,000 per troy ounce! “I stand before you today,” says Gilburt, “feeling almost like Elliott back in 1941. Yes, in 2015 I see that this correction is finally coming to an end, and an important phase of the bull market is about to begin, which could last for the next 50 years. I know this is a pretty daring prediction. However, please remember that for me this is all just mathematics and nothing more. “

So who will be right in their predictions: bulls or bears? Let’s wait and see, there are only “some” 50 years left to wait. Just be patient, this is only business and nothing more.

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