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| Chinese Tourists snapping up gold in Hong Kong after the historical price plunge |
The sudden and sharp correction of gold prices made many people excited for a good reason. This looks like a good time to get into the Gold super rally. I have received many queries from investors whether it is a good time to get into gold now.
My stand is: Gold will fail to perform in the short term (1-2 years) but have a better chance to perform well in the future.
I will attempt to explain my rationale in a simple manner, although the reasoning itself is a pretty complex one itself..
Let's assume there will be 2 probable scenarios (What?!? Scenarios again!! Can't you give me a straight answer!!)
1) Another crisis erupts, probably from Europe, sending the global economy into a slowdown
2) The global economy recovers, being led by US
Outcome of Gold in Scenario 1 (Euro Bust)
We have seen what happened to gold prices during the times when the European Financial Crisis is in full swing. Gold prices moved sideways, despite rampant money printing both US and Europe. Theoretically, Gold is a good reflection of the true value of paper currencies and should appreciate in value when there is a huge increase in money supply. However, that did not materialize. The truth of the matter is, Gold is a reflection of the money supply of US rather than a reflection of the entire world. So, when the Euro crisis strikes, the relative value of USD shot up as the USD is seen as a relative safer currency as compared to Euro, pushing down the relative value of Gold. This theory is made even more obvious with the recent monetary measures by Bank of Japan.
Here we have, another developed nation printing huge amount of money, which should translate to higher gold price, but instead, we have the largest drop in gold prices not seen since 30 years ago. This is because the relative value of USD went up again as Yen fell in value. So as long as the rest of the world engaged in a currency war, trying to devalue their currencies so that they can kick start their economies using the "tried and proven" method to export their way out, Gold will find it hard to appreciate.
Outcome of Gold in Scenario 2 (US Boom)
The other likely scenario is that the recovering US market goes from gear 1 to gear 2 and inflation starts to creep back into the market. When that happens, the US Central Bank will start to scale back on their bond purchase, in order to prevent a potential hyperinflation scenario in the future. With US tightening on their monetary policies and other countries still printing money, the relative value of USD will shoot up and that is very very bad for the relative value of Gold too. However, should other countries start to scale back on their money printing spree too, the potential of gold shooting back up will be pretty high.
The only scenario which will result to a potential appreciation of gold prices is a sharp deterioration of the US economy, which is highly unlikely in the next 2 years.
To Buy or Not to Buy
So, the ultimate question: To buy now or not to buy. If you are looking for a short term speculative returns, I will advice against buying gold. On the other hand, if you are holding on for the long term (5 years and above), it is potentially a very good investment with all the rampant money printing going around the world of today.
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| Commodity prices have been trending down for the last few weeks |
Commodities & Other Implications
Other than Gold, other commodities have seen a moderation of their prices with all the economic slow down around the world. Cracks are beginning to appear in the countries that managed to prosper in the commodity boom of the early 21st century. Russia, Indonesia and Australia are seeing their spectacular growth story being stunted. The effect of the devaluation of the USD, Euros and Yen are still making their way down the supply chain, as manufacturing and commodity countries that export to developed nations see their profit margins being eroded. The currency wars of the developed nations will be big trouble, for the rest of the world, which have grown so dependent on exporting themselves to growth.
Defensive Stance Not a Good Idea?
There has been some concerns from investors that whether it is "prudent" to take a defensive stance when global stock markets have been hitting new highs. Shouldn't we go all out now that the rally looks unstoppable with a wave of good news coming from US and Europe?
The portfolio that I have designed defensively, is meant to ride on both the up & down trends of the market. The increased allocation to USA and decreased allocation from Asia and commodities has worked well in our favor. USA is one of the best performing stock market in the world, out performing almost every Asian market (other than India & Japan) for the month of April. In fact, the bond fund, which is suppose to be the worst performer during any stock market rally, came out strongly (Rank 2 in my list of funds).
The performance would have been worse, if I did not perform any switch during March.
The portfolio underperformed the MSCI in April due to the non-existent exposure to the European stock market, which did very well.
I will not make any changes this month as the market deserved more observation before I throw in the towel and go all out into equities again.
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