“Price Of Gold Crashes” – Diversify And Buy Gold For Long Term

Today’s AM fix was USD 1,232.25, EUR 906.53 and GBP 750.78 per ounce.
Yesterday’s AM fix was USD 1,226.00, EUR 900.61 and GBP 744.97 per ounce.

Gold climbed $3.50 or 0.29% yesterday, closing at $1,228.40/oz. Silver rose $0.01 or 0.05% closing at $19.57/oz. Platinum inched down $0.25 to $1,413.75/oz and palladium fell $0.25 to $733.25/oz.

Gold is slightly higher today in all major currencies and up nearly 1% in sterling after the UK’s industrial and manufacturing production number was much worse than expected.

There was more unusual trading at 10.00 GMT when in a matter of seconds, gold sold off by $5 from $1,233/oz to $1,227.75/oz which is fraction below the opening price today. Then almost instantaneously, gold spiked to $1,237.77/oz and then fell back to the $1,233/oz level once again.

Gold in U.S. Dollars, 5 Day – (Bloomberg)

This type of shenanigans will again make  momentum followers and the technical traders nervous and curtail ‘animal spirits’ and positive sentiment towards gold.

A positive U.S. jobs number today should see gold come under pressure, while a negative one should see gold bid and lead to a higher weekly close. A second higher weekly close today, above $1,237/oz, would be bullish for next week. Support is at $1,220/oz, $1,200/oz and of course what appears to be a double bottom at $1,180/oz.

Sentiment towards gold remains poor despite robust physical gold demand as seen in the data from government mints and Chinese demand.

“Price Of Gold Crashes” – Diversify And Buy Gold For Long Term
This negative sentiment towards gold has been seen in a large number of articles in recent days. Many have focused on gold’s poor price performance in 2013. Some have been balanced, others less so.

Gold in U.S. Dollars, 5 Years – (Bloomberg)

What is interesting is that the articles have focussed almost exclusively on price and the price in the short term – the year 2013 and the price fall since the nominal record high of $1,900/oz in August 2011. The real record high, adjusted for inflation, remains $2,400/oz – nearly 50% above today’s price.

It is also interesting that the articles have been full of subjective opinion – often by so called ‘experts’ such as those in the financial services industry.

The empirical evidence regarding gold being a long term hedging instrument and safe haven asset is ignored.

Most importantly, some of the media completely ignore the most important tenet of investment practice – diversification. Our clients and those who have taken our advice and allocated 5%-10% to gold bullion fared well again in 2013.

Gold acted perfectly as a hedge again in 2013 – while gold was down by 28%, stocks were up 20%-30%.

Investing, rather than speculation, is about the long term. Some of the media are focussing solely on the short term. This is a form of data mining looking solely at the performance of gold since August 2011 and last year, rather than over long term – 5, 10, 20, 40 years.

The long term outlook for gold remains positive due to a combination of macroeconomic, systemic, geo-political and monetary risks.

Banks and the banking system pose risks to investors and savers today and there is real risks with regard to bail-ins and deposit confiscation.

In the coming years, gold will protect investors from the possibility of further falls in stock and property markets and property and stock market crashes. Indeed, it will protect investors from falls in bond prices many of which are at all-time record highs. Finally, it will protect savers and those with cash deposits from the risk of bail-ins and deposit confiscation.

Gold has been subject to rigorous analysis by leading financial academics in recent years. In science, empirical evidence is required for a hypothesis to gain acceptance in the scientific community. Normally, acceptance and validation is achieved by the scientific method of hypothesis commitment, experimental design, peer review, adversarial review, reproduction of results, conference presentation and publication in a journal.

Unfortunately, in the investment community little empirical evidence is required for the hypothesis – gold is a speculation or a risky investment that has crashed – to gain acceptance. All it takes is a few vested interests and their subjective opinion and a lack of understanding and willingness to look at the facts, data and academic research.

As ever, we thought it best to consult an academic who has conducted much research on gold as an asset to get his opinions regarding gold’s recent price falls.

Dr Constantin Gurdgiev is the adjunct lecturer in finance in Trinity College, Dublin (TCD) and was previously a member of the Investment Committee of GoldCore. Dr Gurdgiev has engaged in much evidence based academic research on gold. He found that gold is a “hedging instrument and a safe haven” and presented his findings to the World Bank, ECB and BIS nearly three years ago.

Dr Gurdgiev On Gold As Important Long Term Diversification
“No investor should be advised to take a speculative position in gold, stocks or bonds unless they are made aware of and are willing to face the short-term price volatility that comes along with these assets.

Gold is a long-term risk management asset, not a speculative one. As such it should be analysed and treated predominantly in the context of its role as a part of a properly structured, risk-balanced and diversified portfolio spanning the full life-cycle of the investment and pension horizon for individual investors and those with pensions – whether they be SIPPs in the UK or IRAs in the USA.

Sadly, much of the media coverage concerning gold commonly fails to distinguish the risk management properties of this asset class. Instead, media commentary often focuses on single point-in-time price changes, usually based on timings selected with the hindsight ‘knowledge’.

Such analysis is fallacious, misinformed, if not outright financially misleading.
Furthermore, as exemplified by recent media coverage, majority of financial journalists fail to recognise the fact that unlike many other asset classes, such as stocks and bonds, gold does not suffer from survivorship risk.

As such, gold acts not only as a traditional hedge and safe haven with respect to ‘normal’ or ‘continuous’ risks present in the global financial markets, but also a hedge against large scale tail events.

There is virtually no other asset class, excluding sub-class of AAA-rated sovereign bonds (with some major caveats), that offers such hedging opportunities.

Tail risk events often witness significant destruction of commonly traded equities and fixed income instruments. The best exemplifications of this fallacy are wholly erroneous comparatives between gold price changes and individual stocks price movements involving stocks with high recent exposure to survivorship risk, such as banks equities.

Quoting individual stocks without adjusting for survivorship risk presents a misleading picture of risk-returns relationship that does serious disservice to the public. Quoting such differences immediately after a major tail risk event, such as the global financial crisis, is outright wrong, full stop.

Even more erroneous are comparatives between the short-term gold price movements effects on individual investors and the property price changes.

The two asset classes are vastly different in terms of (1) risks involved in investing in the underlying instruments, (2) availability of different instruments in different markets, (3) leveraging involved in purchasing of these assets, (4) pricing of these assets (commodity vs idiosyncratic non-homogenous assets), (5) liquidity risks, (6) transactions costs, (7) other risk hedging properties.

Such comparatives, as the result, offer a grossly oversimplified view of investment markets.
Well known and empirically confirmed idiosyncratic properties of gold, in my opinion, warrant careful consideration of this asset as a part of a well-diversified and structured long-term investment portfolia.

Speculative appraisals based on highly selective ex-post market timings and prices comparatives, or absurd comparatives across vastly different asset classes, whilst ignoring major risks underlying returns to specific asset classes and even individual equities, is over-simplifying and misleading at best.”


Gold in British Pounds, 5 Year – (Bloomberg)

It is very important to look at the facts, the figures and the academic research on gold. Dr Brian Lucey, also of Trinity College Dublin (TCD) has also frequently researched the gold market. Dr Lucey and Dr Gurdgiev had an excellent research paper on gold published in August 2013 which has been ignored by the financial services industry and much of the media.

They researched the gold market and their paper ‘Hedges and safe havens: An examination of stocks, bonds, gold, oil and exchange rates’ concluded that gold is a hedge against U.S. dollar and British pound risk due to “its monetary asset role.”

Dr Lucey has consistently pointed out how physical gold is financial insurance or a hedge against political uncertainty. Both have advocated an allocation to physical gold in an investment and pension portfolio.

Besides academic research there is also the historical fact and real people and families and their experience of owning gold – both in recent years and in history.

Some of the many times when gold protected people’s wealth are – Germany in the 1920’s, much of the world in the 1930’s, China in 1949, the western world in the 1970’s, the USSR in 1990, Argentina in 1989 and 2001, Zimbabwe in 2008 and indeed much of the western world since 2007 and the financial crisis.

Last year, gold protected people in Cyprus from the deposit confiscation.

History clearly shows that individuals, families and companies that own gold have fared much better than those who do not.

Gold in Euros, 5 Year – (Bloomberg)

Simplistic, subjective and unbalanced anti-gold opinions tend to get media coverage. However, it is important to always focus on the empirical evidence as seen in the academic research, price performance over the long term and the historical record.

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