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05-07-2013, 08:48 AM
THE BUSINESS TIMES
Published July 05, 2013
Gold as insurance should be questioned
THIS week, Swiss bank UBS AG announced the opening of a gold vault in this city state. It followed the footsteps of Deutsche Bank, which announced its 200-tonne facility in the FreePort just a few weeks back, and JPMorgan, which launched its gold vault here in 2010. UBS is not going to be the last. ANZ confirmed to The Business Times that it is in talks to set up a similar facility.
The conventional wisdom has always been that when investors rush into something, be it a business or an asset class, the play is usually at its tail end - at least for the short to medium term. Indeed, since hitting a peak of US$1,888 per troy ounce in Sept 6, 2011, the gold price has slumped by 34 per cent to about US$1,245.
Investors who are buying the yellow metal as a hedge against systemic risks or as an insurance policy against bungling by central banks may be acting on a flawed assumption. A closer look at the numbers indicates that gold price is pro-cyclical: it closely tracks economic growth in two of the world's largest emerging economies, China and India. According to a recent paper by US money manager GMO, between 2000 and 2010, consumers in emerging markets accounted for 79 per cent of total demand. Conversely, purchases by gold exchange-traded funds accounted for only 7.5 per cent of demand. Central banks in aggregate were net sellers.
"Emerging markets have been a significant positive force on gold prices for such a long time that it's easy to forget that their impact on gold can very well go in both directions," GMO noted. "Gold prices not only have extensive exposure to China and India, but their exposure to these countries is pro-cyclical by nature. Given both the cyclical and structural challenges the Chinese and Indian economies are facing, we believe the risks to gold prices today are particularly high," it concluded in a report in April when the gold price was about US$1,600/oz. As such, the value of gold as insurance should be questioned, it stressed.
We can always trust the astute investor Warren Buffett to provide some perspective. In early 2012, he noted that the world's gold stock of about 170,000 tonnes at US$1,750/oz was worth US$9.6 trillion. With that money, one could buy all US crop land (162 million hectares with output of about US$200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, with annual earnings exceeding US$40 billion). After these purchases, one would still have about US$1 trillion left over for walking-around money. A century from now, the 162 million hectares of farmland will have produced staggering amounts of corn, wheat, cotton and other crops - and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions.
Meanwhile, the 170,000 tonnes of gold will be unchanged in size and still incapable of producing anything. "You can fondle the cube, but it will not respond," quipped Mr Buffett. Investors, be warned.
Published July 05, 2013
Gold as insurance should be questioned
THIS week, Swiss bank UBS AG announced the opening of a gold vault in this city state. It followed the footsteps of Deutsche Bank, which announced its 200-tonne facility in the FreePort just a few weeks back, and JPMorgan, which launched its gold vault here in 2010. UBS is not going to be the last. ANZ confirmed to The Business Times that it is in talks to set up a similar facility.
The conventional wisdom has always been that when investors rush into something, be it a business or an asset class, the play is usually at its tail end - at least for the short to medium term. Indeed, since hitting a peak of US$1,888 per troy ounce in Sept 6, 2011, the gold price has slumped by 34 per cent to about US$1,245.
Investors who are buying the yellow metal as a hedge against systemic risks or as an insurance policy against bungling by central banks may be acting on a flawed assumption. A closer look at the numbers indicates that gold price is pro-cyclical: it closely tracks economic growth in two of the world's largest emerging economies, China and India. According to a recent paper by US money manager GMO, between 2000 and 2010, consumers in emerging markets accounted for 79 per cent of total demand. Conversely, purchases by gold exchange-traded funds accounted for only 7.5 per cent of demand. Central banks in aggregate were net sellers.
"Emerging markets have been a significant positive force on gold prices for such a long time that it's easy to forget that their impact on gold can very well go in both directions," GMO noted. "Gold prices not only have extensive exposure to China and India, but their exposure to these countries is pro-cyclical by nature. Given both the cyclical and structural challenges the Chinese and Indian economies are facing, we believe the risks to gold prices today are particularly high," it concluded in a report in April when the gold price was about US$1,600/oz. As such, the value of gold as insurance should be questioned, it stressed.
We can always trust the astute investor Warren Buffett to provide some perspective. In early 2012, he noted that the world's gold stock of about 170,000 tonnes at US$1,750/oz was worth US$9.6 trillion. With that money, one could buy all US crop land (162 million hectares with output of about US$200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, with annual earnings exceeding US$40 billion). After these purchases, one would still have about US$1 trillion left over for walking-around money. A century from now, the 162 million hectares of farmland will have produced staggering amounts of corn, wheat, cotton and other crops - and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions.
Meanwhile, the 170,000 tonnes of gold will be unchanged in size and still incapable of producing anything. "You can fondle the cube, but it will not respond," quipped Mr Buffett. Investors, be warned.