Is There Any Hope Left for Gold Bugs?

Wall St. Cheat Sheet

It has been a brutal year for gold bugs. After enjoying twelve consecutive annual gains, gold is one of the worst performing assets in the market this year. Several firms lowered their price targets, and a headline-grabbing economist renewed calls for the demise of the precious metal. However, there is still a great deal of interest in gold.

Over the course of only two days in April, gold plunged $200 to reach its lowest level since February 2011. In the process, gold posted its worst one-day percentage drop since 1980, and the largest fall in dollar terms on record. On a technical basis, gold reached its most oversold reading since at least 1975. The dismal performance was followed with a 5.4 percent loss in May. In fact, gold has now declined for seven of the past eight months.

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Despite the recent price movement, some companies and countries see a bright future for gold. Deutsche Bank recently opened its second largest gold storage facility in the world in Singapore — a small Southeast Asian city-state. The facility is capable of holding up to 200 tonnes of gold in order to meet rising demand from wealthy investors that prefer having direct access to physical bullion.

Singapore is already one of the biggest financial hubs in the world, and removed a sales tax on gold last year to boost its share in the global gold market to 10-15 percent, compared to the current 2 percent. JPMorgan Chase – America’s largest bank by assets – also has a new facility in Singapore.

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As central banks around the globe continue to manipulate interest rates and markets, more investors are finding comfort in physical gold. Mark Smallwood, Deutsche Asset & Wealth Management’s head of wealth planning, tells WSJ, “Gold has traditionally been stored in London, Zurich, and New York, but there is a serious shift in dynamics going on as the global financial crisis continues to evolve.”

He also adds, “What we’re seeing is customers looking at gold and being cognizant of the fact that when things go wrong, where you’re storing the gold is extremely important. Risk factors for gold are increasing dramatically, and people want to store [it] where they perceive it to be safe, which often will involve geographically diversifying that storage.”

While exchange-traded gold products have seen an outflow for 17 consecutive weeks, demand for physical gold remains strong. In the first quarter of 2013, total gold demand reached 963 tonnes, representing a 13 percent drop from a year earlier, according to the latest report from the World Gold Council. Heavy selling pressure and outflows from exchange-traded funds accounted for the majority of this decline.

In contrast, total jewelry demand jumped 12 percent year-over-year to 551 tonnes in the first quarter, easily topping the five-year average of 500.5 tonnes. Meanwhile, total bar and coin demand increased 10 percent to 377.7 tonnes, compared to a five-year average of 281.3 tonnes.

Once again, China and India dominated jewelry demand by accounting for 62 percent of the global share. The Chinese New Year and India’s good spring harvest were cited as positive developments driving demand in the regions. The U.S. jewelry market posted its first year-over-year gain in more than seven years. Overall, global jewelry demand reached a record $28.9 billion in the first quarter.

Hope is never a good strategy, but there are still fundamental reasons for owning gold. Serious gold investors are not likely to be persuaded to sell their gold because of the recent correction. After climbing higher for more than a decade, a correction was overdue and needed to dampen speculation. A diversified portfolio can still benefit from holding gold.

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Disclosure: Long EXK, AG, HL, PHYS

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