The biggest decline this year has been in commodities and the the precious metals markets in particular. The price of bullion has dipped more than 20 per cent since January, making it the biggest yearly drop to-date since 1981.
Performance of gold and silver in 2013
Source: FE Analytics
On a quarterly basis, we have just had the biggest decline in almost 90 years. Is this likely to continue? I for one can’t see this happening.
We are in a one-of-a-kind period in this market which has never before been experienced in our lifetimes and the natural reaction is for prices to first stabilise – as we have begun to see – and then bounce back. Like gold, silver has also headed for its largest quarterly loss since 1980 as prices in New York settled at $19.47.
There are, however, many commodity strategists starting to buy physical gold and silver, and if this trend continues, it will provide some support to prices.
One should also note that, contrary to popular belief, the average investor hasn’t fled to the local gold store and dumped all their reserves – they are all holding. This should also help prices in the future.
I believe there are serious misconceptions about why the gold price has declined to such an extent.
The only things that have changed are that fewer people are buying – India is the biggest purchaser/importer of gold and has decided to slow down its purchases. The Indian government has tempered demand by restricting gold imports, while Chinese investors are waiting it out after they went on a buying spree in April, but saw prices drop further.
This waiting strategy by the main buyers coupled with the big reserve/central banks and investment banking speculators dumping stocks and pulling down prices through trading is what has caused the value to fall more significantly than we expected.
If someone dumps a large amount of a particular commodity on to the market and no-one is there to buy – because they are expecting the price to go down further – prices are going to fall.
Although not ideal, it is nonetheless clear that the buyers are ready to buy back and buy more; they are just waiting for the right time to do so. This, in my opinion, supports the notion this market will recover and it could be a swift recovery – China and India have not stated they will never buy again, they are just waiting for a better price.
Further to this, few analysts are willing to forecast with confidence bottom prices of the yellow metal, as there is a lot of fear surrounding commodities.
As Warren Buffett always says, the best time to buy is when people are fearful, and gold is no different. This certainly doesn’t help short-term prices but I think that for those brave enough to get involved, taking a longer-term view will prosper in this arena.
For those wanting to buy into gold and silver markets, one of the best ways to do so is through a listed ETF. These closely track the price of gold and silver, with the added benefit of providing liquidity to buy and sell any time the exchange is open.
Economies of scale are very important for anyone who wants to buy physical bullion or silver, as investors get better prices for bigger orders, and also have to contend with high storage costs.
An ETF is not riddled with such problems and is very cheap to trade. In addition, the entity can be bought or sold over an open market exchange, which allows for swifter movement, important in a market that has become so volatile.
Among the largest and most liquid gold ETFs are those at ETF Securities, Source and iShares, which have effectively tracked the price of gold in recent years.
Performance of ETFs and index over 5yrs
Source: FE Analytics
With prices at three-year lows and volatility at historic highs, it is understandable that sentiment is low. However, for those able to stomach short-term swings, the case for gold is as strong now as it was when sentiment was much higher.
