Go for gold while economic outlook remains turbulent

Sure there’s a price for its industrial properties of being an excellent conductor of heat and sound. But this is now an irrelevance in view of the deepening sovereign debt crisis and decelerating economies lifting the bullion price to record levels. However the ensuing 20 per cent downside correction is beginning to alarm even the staunchest of gold aficionados.

In times of market turmoil, the wise turn to fundamental analysis. The sceptics, however, argue that it is impossible to value gold. It has no accounts, no profit nor has it an asset base. So what is a reasonable price, they ask rhetorically.

The potential to get this wrong is massive. Gordon Brown sold nearly 300 tonnes of bullion ten years ago at average price of $275 an ounce. That would have been after lengthy consultation with a coterie of experts, proving that it is very easy to get these things wrong.

Expert market commentators have spotted a double top, which chartists will tell you is the preface to further declines. But even more importantly and concurrent with this technical formation was a decision in the US that the margin on gold futures contracts was to be raised by 20 per cent. This was unquestionably a body blow for gold. Without going into detail, it also combined to further depress the bullion price, but it may have the opposite effect in the longer term.

So it seems there were some recent fundamentals pointing to a correction.

Even those commentators who believe the current gold price as a classic bubble tempered their comments. In a recent newspaper article one expert said: “There may not be a crash and prices may go higher but demand will reduce and prices with it when the world decides that the recession is over and starts buying equities again.” Talk about sitting on the fence.

Elsewhere another commentator remarked that a “valuation of gold must be anchored with some sense of an appropriate valuation, which is essentially impossible to do”. But that’s simply not true.

So where does that leave us? It leaves investors with a large repository of reasons for gold to go higher. But the words “caveat emptor” are bound to spring to mind in view of the ferocity of the recent correction.

So it’s a good time to look at the fundamentals, because there are some.

Firstly on the global supply side, although we do not have 2011 figures, gold mine production at 2,689 tonnes last year was only 4 per cent ahead of the previous year and the increase will again be modest in the current year. Official sales were zero in 2010 but have risen sharply this year. For example, China has increased its holding by 30 per cent and Korea has massively increased its gold holding by over 60 per cent, with Thailand, Russia and India all following suit.

On the supply side, jewellery offtake in 2010 was 2,017 tonnes, representing 75 per cent of global gold production. Other fabrications absorbed 763 tonnes – up some 9 per cent – so there is still industrial demand. Investment was 12 per cent lower at 1,378 tonnes, which accounts for last year’s sharp gold price rise and if the market is again being starved of the yellow metal, new highs are inevitable.

In the absence of good economic and financial news, investors would be wise to ride out the current downturn and maintain their stake in gold. That must be best advice for the time being.

Gordon Scott is a private banker and head of wealth managers Kleinwort Benson in Scotland