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PA ANALYSIS: Is it 1982 all over again for gold?

From pa analysis Oct 29 2013 BY: Sarah Miloudi , News Editor , Portfolio Adviser

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Despite climbing by more than 10% a year since 1968, bullion has struggled to post anything other than flat returns during 2013.

With global growth on the up, it’s hardly surprising that the precious metal has had such a difficult run, but put in its historical context, gold hasn’t performed as badly in more than 30 years, leaving experts wondering whether gold is now looking incredibly cheap.

“Upside down” year

As pointed out by Adrian Ash, head of research at gold and silver exchange Bullionvault.com, the yellow metal has had an “upside down year”, offering investors little clarity about where gold's price could be heading next.

“Gold in 2013 has done almost exactly the opposite of what it typically does,” he said. “Crashing in spring, and rising sharply in summer, the gold price has reversed what veteran investors call seasonal patterns.”

Looking at bullion’s numbers, Ash clearly has a point. Normally the shine comes off the precious metal in the summer because Asian investors have just spent the quarter before stocking up, then demand normally picks up again in the autumn as India’s Diwali - the festival of lights where gold is traditionally bought around or on the day - draws closer.

Analysing the price movements over the year so far, Bullionvault’s Ash said the bulk of the time gold has done the opposite of what history would suggest, and only at two points, July and August, has gold been able to turn its flat numbers into a 19% rise.

“Only in March did gold really stick to the script, and even then it turned the average post-1968 slip of 0.2% into a nasty 2% fall,” Ash said.

"Looking at `2013, the last time gold performed anything like this badly was in 1982. From the start of that year, gold prices fell 25% by the end of June; this year gold sank 30% down by midsummer. 1982 then bucked gold’s more bearish trend with Dollar prices ending the year 8% up overall. Where the price will be at the end of this year remains to be seen, but one thing’s for certain, 2013’s topsy-turvy ride for gold isn’t over yet,” he added.

Stage set for a turnaround

However others disagree with Ash and while they acknowledge that gold (and silver) have been hard pressed at times, they believe that the precious metal’s fortunes will change.

According to the team at Golden Prospect Precious metals, a “renewed upward trend” may be seen once gold’s weak holders and speculators have been “shaken out” the market.

Portfolio manager Will Smith said he believes we have already seen the worst in terms of the gold price for this year and that the fundamental reasons for holding gold are still valid, though for gold equities, challenges around costs remain.

Speaking to investors, Malcolm Burne, chair of Golden Prospect Precious Metals, said that he, too, is upbeat on gold’s outlook, though concerns surrounding quantitative easing (QE) among other things could act as a powerful headwind.

Burne said: “Whilst all the positive arguments for gold should remain intact going forward, prices will continue to be directed by news events surrounding the current geopolitical turmoil, QE tapering by the Fed and the eurozone debt crises.

“Gold will always be an emotional subject with many bankers and investors. But without any counterparty risk that other financial instruments carry, it still remains the best insurance policy around today. When serious inflation inevitably kicks in once more the final stage of gold's long-term bull market should see gold and silver shares outperforming all other forms of investment and asset classes in quite a spectacular way.”

 

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