No Recovery – What does it mean for Bullion? – CONTRIBUTOR STORY

Aug 31, 2014 - 12:46 PM GMT

Several days ago, I wrote about why, 5 years on from the supposed “end of the GFC”, we didn’t believe the global economy was really recovering, and laid out the four things we’d need to see to convince us otherwise.


Going forward, this lack of recovery is likely to see precious metal prices head significantly higher, as investors the world over rediscover what the true nature of a ‘safe haven’ asset really is.


That they will need a safe haven in the coming years would appear inevitable, for as Mike Mangan, portfolio manager at 2MG Asset Management observed recently


““Meteorologists (and insurers) speak of the 1 in a 100 year flood. But what is happening in western economies (and Japan) is not even close to a 1 in a 100-year event. It has not happened in centuries and I would argue human civilisation hasn’t experienced the sort of monetary conditions we now bear witness to, since the Bronze Age. How and when it all ends, no honest person knows. But I strongly suspect that when it ends, it will end badly.


To their horror, these investors will likely find out it’s not lending to over-indebted sovereigns who are currently paying them the lowest yields in centuries, and who have no intention of honouring their financial commitments in the coming years, at least not with dollars, euros, pounds or yen which have anywhere near the value they do today.


They’ll also find out a ‘safe-haven’ is not leaving your money in an over-leveraged bank, where again, for the privilege of lending them money you’ll earn a desultory rate of interest which is not even protecting purchasing power.


Nope – in the coming years, investors the world over will realise that THE safe haven is physical gold, mankinds enduring image of wealth, value and prosperity.


For despite its naysayers, physical gold and silver represent not only the ultimate but ultimately the only safe haven asset on the planet, for the very simple reason that, as even the Reserve Bank of Australia has acknowledged, gold “is the only asset that is not a claim on some other government; international institution or bank.”


Physical precious metals represent THE real safe haven – scarce, pure, liquid, and beautiful – qualities that will increasingly come into favour in the coming years.


The fact that historically, low to negative real interest rate environments, like the one we are stuck in today around the globe, have traditionally been the sweet spot for precious metal investment, with returns averaging around 20% per annum, will also become more widely appreciated in the coming years, especially when the current global equity market rally inevitably hits some turbulence.


This will further encourage a reallocation of investor capital toward the severely undervalued precious metal market.

The cherries on top of the bullish outlook for the precious metal market are to be found in the activity of global central banks, and the emerging wealth, and precious metal buying in China and India


Global central banks, net sellers of bullion for nigh on two decades, are now purchasing 400-500 tonnes of physical gold bullion each year, and will do so for the coming years, as emerging market central banks in particular look to build up their precious metal reserves, and find a diversifier from their mammoth holdings of US Treasury debt.


The citizens of China and India need no encouragement to buy gold – and demand from this source will continue to strengthen. In China, where they save 30% of their incomes, over 80% of citizens see gold jewellery as investment, according to research by the World Gold Council, who project that Chinese demand will grow by 20% in the coming years.


In India, the outlook is also positive, with a combination of rising national incomes and incredibly favourable demographics likely to see gold demand, already circa 1000 tonnes per annum, strengthen in the years ahead.


As a result, whether we look at gold’s traditional role as THE safe haven asset, central bank purchases, or the strengthening demand from emerging market citizens, one can’t help but be bullish on gold over the medium to long-term.


How do investors play this?


Whilst I’m enormously confident on the long-term price projections for bullion, it’s only fair to point out that the more immediate outlook is far from certain.


The ETF market is far more constructive than 2013, central banks continue accumulating steadily and even the futures market looks much steadier today, but it must be stated that the path of least resistance for the short term is likely still down.


The fact that the flare-ups in the Ukraine and the Middle East haven’t seen a larger run to gold is also concerning some, for it hints at an underlying weakness in the market.


As such, whilst I think there is a chance the double bottom around USD $1200z represents the bottom of this market, a re-test of this area is not hard to imagine, and in an even worse case scenario (think a GFC style sharp crash), we could see gold head all the way back to USD $1000oz.


Some will be scared to hear that – but that would be proper back up the truck time.


The implications for investors when assessing both the long and short-term price projections for precious metals is simple – and the first of those is that you should ensure you have a strategic allocation to physical gold in your portfolio.


Whilst in percentage terms what that allocation should be is different for each person, 10% is often seen a decent starting point if you’re new to precious metals.


For me personally – I’m very attracted to the idea of the Permanent Portfolio, a process by which you divide up your capital into four lots of 25%, and invest equally in gold, cash, bonds and equities. Doesn’t get much simpler than that –and the results over the long term are exceptional.


That’s the long term sorted.


Short-term, don’t try and time the market to perfection, for it is incredibly unpredictable, and they most certainly won’t ring a bell at the bottom.


Instead, use the current weakness and uncertainty as a time to dollar cost average your capital into precious metals, so that you end up with the total exposure you’ve decided on.


By staggering your purchases, you ensure that you’ve already established a key position, but still give yourself the flexibility to benefit from potentially lower prices


Years from now, I’m certain you’ll be happy with how its turned out.