CT: Gold loses its glitter: three managers on the price drop shock
The traditional investor safe haven gold dropped to a five-year low on July 20, with the price of the yellow metal falling to $1,088 per oz.
The drop was viewed as a combination of factors, including Chinese investors selling off holdings to cover the stock market crash and others positioning ahead of the Federal Reserve's expected September rate rise.
But where does it go from here? Citywire Global asked fund managers and market commentators who specialise in the precious metal how they were coping with the price change and when gold will once again glitter.
Drop is over-stated
Bernhard Graf, who co-manages the AMG Gold Minen & Metalle with Citywire A-rated Fritz Eggimann, thinks there is a big discrepancy between shares in gold mines and the price of gold, but is unsure how and when this gap will correct.
The gold price hasn’t really fallen a lot. There is so much talk about gold price crashing but it dropped about $50 dollars which not even 5%. It is the gold mine shares that have collapsed, especially over the last couple of days, when they were falling almost 20%.
The gold mining shares are almost at the same levels as in 2000 where the gold price was at $300 dollars. It’s time to buy gold mining shares, not physical gold. The gold mining shares represent gold below ground.
We know the way to protect the fund is through cash and nothing else for the time being. We think it will be a 'V-shape' recovery. It could well be that a rally in the mining shares could be very strong, with a big gap opening on the upside.
If you are sitting on a lot of cash then you will miss a lot of upside potential. I think at some point you have to go against the market and just buy it.
Currency of last resort
Philipp Vorndran, chief strategist at German investment and wealth management firm Flossbach von Storch, believes investors still need gold regardless of short-term shifts.
Gold is, and remains, the currency of last resort. This precious metal always gains importance when investors are worried about the stability of the financial and monetary systems.
Since 2012 the concerns of some market participants have apparently lessened. We do not share this opinion. The central banks are currently conducting an enormous experiment with an uncertain outcome. They are trying to get the monetary system going again by massively increasing the amount of credit money.
In the event this plan should fail, the citizens of many countries could lose their trust in paper money. Should this loss of trust happen, then people will be on the lookout for alternatives. Gold is likely to play a role in the future and, therefore, it should be a fixed component in a broadly diversified investment portfolio.
The current positive development of the stock market is the biggest enemy of gold. First-class equities fulfill a similar function as a material value - like gold, in many cases yielding a reasonable rate of return.
Short-term to tough to call
Stefan Breintner manages the DJE Gold & Ressourcen fund. He currently has half of the fund exposed to gold and believes there are few reasons to increase exposure.
Things are more positive in the long-term, but I can’t rule out that it will fall to $1000 in the short term. Normally, the end of July is a good season. India is coming to the market with its wedding season and the period last summer to late autumn was quite good. The gold price was up and the mining equities were also up.
In the second half of 2015 compared with 2014, most of the gold mining companies have a better cost position due to depreciating currencies in production countries to the US dollar and also due to the lower oil price and therefore lower energy costs. This will help the margins of the mining equities.
In the short-term it is impossible to predict. Over two-to-three months there are not many reasons to buy, but this could change very fast. The difficult thing is to predict is when will this happen.
In the longer run I am sure we will see a massive support for the gold price because of the difficult supply situation so we will have our gold peak production in 2015 and we will see declining gold mining output going forwards.
I think this decline in output will accelerate because of the situation now. No one is able to invest in growth because the companies are so under pressure that they just want to keep their business alive.
