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The golden opportunity in the commodities rout

by Robert St George on Feb 05, 2014 at 11:53

That fear nonetheless contributed to the total amount of gold held in ETFs swelling from 38 million ounces to 85 million ounces between 2007 and 2013. The sell-off last year has taken that back down to 55 million ounces now. If it keeps going to the starting point of 38 million ounces, Steel calculates that the gold price could plunge to $850 from around $1,300 today. However, he doesn’t ‘believe for a minute’ that that will transpire.

His confidence is premised on the ‘overwhelmingly’ positive supply and demand picture. ‘Gold always goes where the money is.’ That means China, which Steel remarks is in the historically unprecedented position of being both the world’s largest importer and its largest producer of gold. China is furthermore approaching the GDP per capita inflection level of $8,500, the point Steel says households tend to begin buying gold. For comparison, India is at $3,300. ‘This will compensate for any further disinvestment from the West.’

Steel recognises that that demand, provided by millions of consumers, will not have the same immediate impact on prices that bulk selling by institutions did last year. But he suggests that another overlooked factor is the drop in scrap gold supply – a response to lower prices – which he reckons is equivalent to central banks doubling their gold purchases in terms of taking the metal off the market.

Those more interested in gold-mining stocks may note a separate development in that space. Gold equities have historically traded on a 3:1 beta ratio with the broader market, ranging from a peak of 10:1 to a recent low of 1:1. The beta in the sector is now 1.8:1, says Evy Hambro, chief investment officer in BlackRock’s natural resources team. ‘That beta is really starting to come back in the gold equity space.’

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