Gold remains an unattractive investment for most fund managers as central banks' reserves continue t...
Gold remains an unattractive investment for most fund managers as central banks' reserves continue to flood the market, helping keep prices down despite a positive supply and demand imbalance.
Fund managers reticence to invest in gold is understandable, claims Ian Morley, chief executive of Dawnay-Day Olympia. "Not many funds invest in gold these days. Holding gold is not a good investment, it yields no return and you can't convert dollars into gold.
"So many other asset classes are yielding real returns, such as equities up until a year ago, the bond market and property market. You can write options strategies around gold, but just holding it is the ultimate defence mechanism," he explains.
Ian Henderson, manager of Save & Prosper's Commodity Share fund, prefers to invest in gold mines rather than the end-product itself. Although a few mines have fallen by the wayside owing to the difficult market. He says profit can be made if production costs are kept low.
Currency weakness in the key production centres of South Africa, and to a lesser extent Australia, has helped protect goldmines from the worst ravages of the market, Henderson says. "The South African rand has been very weak and the Australian dollar has been reaching record lows. This has cushioned the gold market and, in rand terms, gold prices have been going up," he explains.
Henderson says overall the gold market is faring well but despite certain positive fundamentals being in place for a price hike, such as demand outstripping production rates, the glut of gold pumped into the market by major international and financial institutions continues to quell any significant recovery in prices.
"The fundamental supply and demand case is very positive. In the year 2000, mine production was about 2,600 tonnes, and total demand was around 3,700 tonnes. Under normal circumstances this would be very positive, but central banks have large stocks and are persistent sellers and this absorbs the demand," he says.
Morley says gold is still prevalent in government reserves and is now being sold by, among others, the IMF and major European central banks. "Efforts to demonitize gold have worked to some extent. For banks and government institutions it's now a fall-back, but it still represents a significant portion of government reserves," he explains.
Economic conditions have been detrimental to gold prices for some time, argues Morley, pointing to the $800 per ounce price spike of 197980, when inflation was very high. "The value has fallen considerably over the years. What tends to get prices up is mostly high inflation and volatility in the markets, and weaknesses in currency," he claims.
Henderson is not overly bullish and agrees that a period of high or indeed hyper-inflation could bolster prices, but does not expect one to be forthcoming.
Looking forward, he believes the recent tragedy in India could further limit chances of any possible rally by gold. "The Indian disaster will probably put a bit of a dampener on the gold prices as India is the biggest off-taker of gold in the market," he comments.
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