Gold bugs must feel like investment road-kill after the precious metal’s brutal sell-off this month. Gold bullion had its biggest two-day fall in 30 years, amid talk of weakening jewellery demand from India and China, and potential forced sales of gold from troubled European countries.
Australian gold stocks tumbled. Led by sharp falls in Newcrest Mining, the S&P / ASX Ordinaries Gold index has slumped 42 per cent over one year, and on a total return basis (including dividend reinvestment) has underperformed the ASX 200 by about 64 per cent.
So much for gold being a supposed investment safe-haven as central banks worldwide print more money through their quantitative easing programs and stoke expectations of higher inflation in the next few years. With global economic risks still elevated, gold should be doing better.
Contrarians might see gold’s sell-off as a once-in-a-decade buying opportunity. A chorus of commentators believe gold is heading higher in the long run, as central banks are forced to maintain their quantitative easing programs for longer than expected.
Certainly, a deterioration in the US economic recovery, persistent weakness in the Eurozone, and more mixed economic signs from China would force central banks to remain in aggressive monetary stimulus programs and, in theory, support a gold-price recovery.
However, it is hard to find a catalyst to re-rate gold bullion and gold equities in the next six months, or build a compelling case that gold is attractive on a risk-return basis, relative to other assets.
A slowly recovering global economy; improving investor risk appetite, albeit with bouts of high volatility; and no sign of near-term inflation, is a poor backdrop for gold, which usually trades more on investor sentiment than demand and supply fundamentals.
Also, gold looks terrible from a technical-analysis perspective, with recent price falls breaching key support levels on the US-dollar gold chart. The price momentum suggests further falls.
The other precocious metals - silver and platinum - have more short-term appeal. Silver is an interesting play on an eventual recovery in precious metals prices and stronger demand from the electronics industry, where it is used. Strong growth in electronic gadgets is good for silver.
Sliver has slumped from about US$32 an ounce in January to US22.50. The world’s largest exchange traded commodity (ETC) provider, ETF Securities, noted fund inflows into its silver ETCs in April were the highest in almost seven weeks, as speculators bet on a recovery.
Over 12 months to March 2013, US$336 million has gone into ETF Securities’ silver, platinum and palladium exchange traded products. Expectations of a stronger global economy, and more industrial demand for silver and platinum, attracted bargain hunters to these metals.
I follow money flows between commodities, using ETF Securities data. Speculating on commodity price moves is one thing; seeing how the smart money is moving between commodity ETCs on a global basis is another. For example, ETF Securities notes that most selling in gold has been from speculators with a negative short-term view on gold; long-term investors are still holding gold as insurance against worst-case global economic scenarios.
Platinum and palladium is also seen as a proxy on global economic growth, given their main use is in car emission systems. Of the two, ETF Securities says palladium has had the largest inflows this year, at US$81 million.
Palladium is typically used in petrol vehicles favoured in the US, and platinum is mostly used in diesel vehicles favoured in Europe. With US car sales healthier than those in Europe, palladium looks a better bet than platinum. Ongoing supply disruptions in South Africa, where these metals are mostly mined, strengthen the medium-term outlook for both metals.
I favour using exchange traded products for precious metals exposure rather than buying equities directly; it eliminates company risk and equity market risk. Gold shares have for years underperformed gains in gold bullion and strengthened the case to buy the commodity instead. A range of commodity ETCs are listed on ASX.
Of course, those with a favourable view on precious metal companies should buy the shares, but there are not many pure silver or platinum and palladium plays to choose from on ASX. And too many precious-metals companies have destroyed shareholder wealth in the long run.
The other attraction of commodity ETCs is the currency. A peaking Australian dollar, or the prospect of slight falls later this year, would be good news for local investors who buy commodity ETCs using our currency. Even so, commodity ETCs suit experienced investors comfortable with higher risk.
Such investors should keep closer eye on silver, platinum and palladium in the next few months. They have been caught in the broader precious metals and commodity price rout, but unlike gold have more exposure to a recovering global economy and improving investor risk appetite. Silver looks especially interesting in the long term, as demand from the electronics industry grows.
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Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at Feb 14, 2013. The author implies no stock recommendations from the above commentary. Readers should do further research or talk to their financial adviser before acting on themes in this article.