Adrian Ash, head of research at BullionVault, argues the crash of 2013 simply proved gold's role as ‘investment insurance'.
The gold crash of 2013 had several causes, chief amongst them talk of tapering by the Federal Reserve and surging stock markets worldwide.
The speed of the turnabout in sentiment about the asset class was caused by a sudden attack of rational thinking among investment managers.
Cooler heads were long overdue, after the gut-panic whirlwind of the financial crisis had followed the ‘keep dancing’ madness of the credit bubble. Against both mass delusions, gold offered an antidote.
After the gold crash
It remains the best-performing major investment of the last ten years. But while gold was perfectly rational when the world was losing its head, many recent investors found a position in unyielding, relatively useless gold (only 15% goes to industry each year) hard to justify as the dust cleared from the financial and even eurozone crises in 2013.
Platinum, a metal much easier to predict, quite rationally regained its premium-per-ounce to gold prices in 2013, undoing a two-year anomaly not seen since the mid-1980s.
Sadly for 2013’s growing number of platinum ETF buyers, however, last year’s much-debated deficit between supply and demand failed to stop prices falling 11% (the debate being whether the leap in ETF holdings should count as demand or a non-industrial surplus).
Among the other precious metals, only palladium escaped gold’s downdraft, edging 3% higher. Rhodium slipped 10%. Minor metals ruthenium and iridium sank 37% and 62% respectively.
Demand for gold did not vanish in 2013, of course. The world still turned over some 4,500 tonnes, and little changed from 2012 except for Asian, and notably Chinese households, buying all the gold shed by Western ETFs and other funds.
It is vital to note, however, China’s demand leapt as a result of the price drop. It failed to stem or reverse it, and it was the exit of Western ETF gold, plus the positioning of speculative traders in US gold futures and options, which drove the action.
From the record-high holdings of December 2012, gold ETFs turned what had been around 250 tonnes of annual demand since they were launched a decade ago, into 800 tonnes of supply.
From a strongly bullish stance in Comex futures and options, hedge funds and other leveraged speculators as a group raised their betting against gold prices to the highest level since 1999, the very low of gold’s previous two-decade bear market. The price buckled.
Whether this rush for the exit is quite exhausted or not, 2013 proved China’s surging gold demand – now the world’s number one, overtaking India last year as the subcontinent hit import restrictions aimed at reducing its current-account deficit – still does not set prices worldwide.
Western money managers make the running, and it was their about-turn in sentiment which sparked the crash in gold prices last spring, pulling the rest of the precious metals complex down alongside.
Like a growing number of private investors in the West, however, large allocations in Asia took the price crash to be an opportunity, adding new gold holdings as a long-term investment. History at least backs their thesis.
Analysis of total annual returns over the last 40 years confirms gold tends to rise when other, more typically profitable investments fall, and vice versa.
Measured against stocks (US and non-US), bonds (corporate and Treasury), cash and real estate (commercial and residential), gold’s positioning is the most variable by our reckoning, coming top of the table seven times but placing bottom 11 years since 1973 (see chart).
Of the ten years gold placed in the top three performing asset classes, the bottom three included US stocks six times. Of 17 times US stocks came in top three, gold placed in the bottom three 13 times.
Logical money managers looking to smooth their returns will also note that overall, across the last four decades, investing in REITS (11.9% annual average), just beat US equities (11.7%), which just pipped non-US stocks (11.1%; all total returns, before costs or tax, in dollar terms). Then came gold (10.6%), with a smaller maximum annual loss than all three.
Perverse as it sounds then, and against last year’s sharp rise in equities, the crash of 2013 proved gold’s role as investment insurance. More short-term investors and traders may ask whether we just saw a replay of 1981’s start of a bear market, or 1975’s reloading of a powerful secular rise.
Gold’s yearly returns compared with other US and UK investments
Gold vs inflation – historically
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