The bears have certainly been loud this year, as short-term bets against gold paid off in the first half of 2013. Gold lost 27% in Q1, the worst first-half performance since 1981.
Gold futures shed 23% in Q1, the most since Bloomberg data began in 1975. On June 28, gold futures hit $1,179.40, the lowest level since August 2010.
The continued gold prices rout is “shattering” investors’ confidence, Ric Deverell, head of commodity research at Credit Suisse Group (NYSE:CS) said in a recent report.
Many investors have simply thrown in the towel. They’re discouraged by lower forecasts from analysts.
Deverell wrote on June 25 that he thinks the yellow metal will likely fall to $1,150 in 12 months. The same day, Morgan Stanley (NYSE: MS) cut its 2014 outlook 16% citing diminishing demand for the safe-haven asset.
But we know there’s a lot more to the gold story than what the first half of 2013 has shown. In fact, lower gold prices now have created incredible investing opportunities, as prices will rise again…
Why Gold Prices Will Rise
While gold prices have had a necessary pullback this year, global central banks have ramped up their easy money policies.
And even if the Fed does start to taper, thanks to an improving U.S. economy, global printing presses are still going at full speed. The Eurozone region, Japan and China are very likely to continue stoking their economies. That should eventually boost demand for gold as an inflationary hedge.
“Never before have such enormous monetary policy experiments taken place on a global basis,” analysts at asset management firm Incrementum AG in Liechtenstein wrote in a recent report, “In Gold We Trust 2013.” “If ever there was a need for monetary insurance, it is today.”
Indeed, gold prices climbed Tuesday as escalating inflation in China boosted attraction of the metal as leverage, and increased demand for gold jewelry, coins and bars. The National Bureau of Statistics reported China’s consumer price index rose 2.7% from a year ago. Estimates were for 2.5%.
Here in the U.S., we have yet to see inflationary effects from five years of quantitative easing.
But they’re coming.
“With all the easy money floating and some economies continuing to stimulate, we will see inflation, and gold will find favor at some point,” Martin Murenbeeld, chief economist at Toronto-based DundeeWealth Inc. which manages about $95 billion of assets told Bloomberg. “Gold is going through a mid-cycle correction, but the fundamental for higher prices remain intact.”
Consider that since the Fed was created in 1913, the U.S. dollar has lost 98% of its purchasing power. Meanwhile, gold has risen from $18.92 an ounce to a peak of over $1,900 an ounce.
Just check out this chart that shows the decline of the dollar’s purchasing power.
That makes a very solid case for owning gold through bull and bear markets.
This is why long-time gold bear and legendary short-seller Doug Kass, founder of Seabreeze Partners Management, sees a golden opportunity in the yellow metal and said this about owning gold now:
“There is probably no better time to consider diversifying one’s portfolio into a depressed asset class like gold when the crowd is optimistic about a vigorous and self-sustaining economic recovery and when the world’s stock markets are at record high prices,” Kass recently told CNBC.
“Investor sentiment toward gold probably can’t get much worse,” Kass continued, “and the growing optimism regarding the trajectory of global economic recovery may not get much better in the weeks and months ahead.”
Just this week, the International Monetary Fund (IMF) trimmed its estimates of U.S. and world growth by 0.2 percentage points for this year and next.
Plus, demand for gold in Asia is soaring.
India’s import duty on gold (to combat the country’s account deficit), and the rupee’s decline against the dollar, have weighed on gold – and stoked demand.
“The Indian government specifically has been making it more and more difficult for your average Joe on the street in India to buy gold. Having said that, their appetite is voracious for the metal and they’re not going to stop,” Sean Lusk, director of commercial hedging with Walsh Trading told Kitco.
Related: SPDR Gold Trust ETF (NYSEARCA:GLD), iShares Gold Trust ETF (NYSEARCA:IAU).
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