Q1. Following the recent increase in Gold Price, does it still make sense to purchase Gold?
A1. Yes,it does make sense because:
- Historically, adding precious metals (both direct/ indirect) improved Portfolio Performance
Empirical studies such as the 2007 study published by CFA Institute* show that over the course of 34 years between 1973 and 2006, adding precious metals to portfolios significantly improved the performances while reducing the portfolios' overall volatility levels. The study found positive evidence both for direct investments (gold, silver, platinum, etc) as well as indirect investments in the precious metal firms.
- Precious Metals are good hedges against crises
Since 2008, we have been facing many different crises ranging from the Sub-prime crisis to the European Debt crisis and from Deflationary concerns to the Middle Eastern crisis. It has been an extremely volatile and uncertain time period during which investors rightly turned towards precious metals as a safe haven. We feel that this cycle of crises is likely to continue, albeit less strongly, in the future. There is certainly some room for precious metals in the portfolio as protection.
- The Asian demand for Gold is real and it is likely to drive the price of Gold upwards in the future.
Central bank gold holdings continue to be concentrated in the Western world, with the US and the eurozone constituting just over 60% of gold reserves held by central banks globally. However, the Asian Central Banks, which hold more than 60% of world FX reserves, want to diversify away from USD into more reliable financial mediums. Their concern arises from the aggressive Quantitative Easing Programs launched by the Fed. For them, Gold seems to be the ideal candidate. If the Asian Central Banks were to bring the Gold part of their reserves up to the global average of 11%, they would certainly buy at least 1000 tonnes of Gold. This will be a real demand driver.
Q2. Compared to other precious metals, stocks and oil, is Gold expensive? Is it expensive in historical terms?
A2. Precious Metals are not very cheap, but their current valuations do not represent any bubble neither. Gold is still buyable.
- Historical Point of View
- Comparative Perspective
From a comparative perspective, what we clearly observe is the fact that Gold is not very cheap when we look at the ratio of the precious metal compared to major European and American indices. However, compared to the other precious metals notably Silver and Palladium, Gold is not very expensive. In EUR terms, Gold is still below its 10-year high of 1067.569 EUR. Basically, the valuation picture gives a mixed picture of the metal neither overly-expensive nor very cheap.
Table: Gold Ratios
Source: Bloomberg (Feb 25)
Ratio | 10-year Low | 10-Year High | Current Level (Feb 25,2011) |
Gold/Dow Ratio | 0.024 | 0.1334 | 0.112 |
Gold / Stoxx 600 | 0.772 | 5.449 | 4.759 |
Gold/Oil Ratio | 6.753 | 16.258 | 14.136 |
Gold/Silver Ratio | 45.953 | 80.452 | 47.502 |
Gold /Platinum Ratio | 0.434 | 0.944 | 0.743 |
Gold/Palladium Ratio | 0.319 | 4.808 | 1.634 |
Gold/EUR Ratio | 289.248 | 1067.569 | 973.273 |
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
