Gold Q&A with Jodie Gunzberg, VP of Commodity Indices at S&P Dow Jones

Jan 3rd, 2014 | By | Category: Commodities

In 2013, the S&P GSCI Gold and DJ-UBS Gold indices fell 28.3%, with investors in gold-linked exchange-traded products (ETPs) taking a major hit.

Gold Q&A with Jodie Gunzberg, VP of Commodity Indices at S&P Dow Jones

Jodie Gunzberg, Vice President of Commodity Indices at S&P Dow Jones Indices.

The last time gold fell this much was in 1981 when it lost 32.8% and it took 25 years to recover its drawdown.

Given the severity of this loss and the magnitude of outflows from gold ETPs ($36.4 billion in the 11 months to 30 November 2013, according to BlackRock), many questions have been asked about the future of gold.

Jodie Gunzberg, Vice President of Commodity Indices at S&P Dow Jones Indices, answers some of the most popular questions on ETP investors’ minds:

After the large gold sell-off in 2013, do you believe gold can still be viewed as a safe haven?
The idea of gold as a safe haven doesn’t mean it is always a profitable investment – it just means investors are comfortable with gold as a store of value in uncertain economic times. In fact, in 2013 it was the safe-haven concept that drove gold down the most since 1981. Investors feared the fed tapering all year long, which might indicate a stronger economy.

Do you believe investors are no longer comfortable with gold as a store of value?
Gold as a store of value can be defined by the framework of super asset classes where capital assets, such as stocks, bonds and real estate, provide an ongoing source of value that can be measured using the present value of future cash flows technique. Consumable or transformable assets, like commodities, only provide a single cash flow. Store of value assets such as currency and fine art are not consumed and do not generate income but do have a monetary value. Gold is a unique commodity that has a dual purpose of currency and whether investors are comfortable with gold as a store of value may depend on their view of the relative value to the US dollar, where a stronger dollar is generally bearish for gold.

Is there anything that might replace gold as a store of value that investors might turn to in the New Year?
The most likely substitutes for gold as a store of value are other currencies or assets like artwork that have a value but no cash flows. It is more logical to replace gold with an asset like the US dollar than with an industrial metal that is consumed/transformed, though cases have been made for using other precious metals like silver or platinum.

Besides the fed tapering, what else may drive gold down for 2014?
A stronger dollar, low inflation and an increase in producer hedging may be bearish for gold. Higher producer hedging is especially important as an indicator since it is evidence of negative sentiment by the companies that are at most risk from a gold price drop.

Are there any bullish factors for gold in 2014?
Strong Chinese demand growth may be better for copper than gold, given its economic sensitivity. However, the physical demand growth for jewellery in China has been strong (18% year-on-year Q3 2013 according to the World Gold Council) and Indian consumption may rebound after the government crackdown on imports. Also, it is possible the fear of the slowdown in quantitative easing has been priced into gold already.

What do you see going forward for gold?
In 2013, the S&P GSCI and DJ-UBS Gold fell 28.3%. The last time gold fell this much was in 1981 when it lost 32.8% and it took 25 years to recover its drawdown.  Although in 1982, gold rebounded 12.5%, it lost another 32% in the next 2 years. If history repeats itself, it could take a long time for gold to recover but it could be viewed as a bump in the road of the long bull trend that has gained over 700% in the prior 12 years.

Do you have a bullish outlook on any other metals for 2014?
There may be a bullish case for industrial metals if Chinese demand growth is strong. Copper is most economically sensitive, though palladium is particularly responsive to the automobile market.  However, after the financial crisis, the surplus of inventories has largely depleted in metals like aluminium, lead, nickel and zinc that make them more sensitive to supply shocks and demand increases to support their prices. 2014 may hold the turning point for the inventories from excess to shortage, which is generally profitable.

For UK investors, the following gold ETPs are among the most popular:

ETFS Physical Gold ETC (PHAU)
Backed by segregated, allocated physical  gold bullion held by HSBC, the custodian. All physical gold metal held with the custodian conforms to the London Bullion Market Association’s (LBMA) rules for Good Delivery. London listed. TER 0.39%.

Source Physical Gold P-ETC (SGLD)
Physically backed by allocated gold bars held in JP Morgan Chase’s London vaults. Listed on the London Stock Exchange, Deutsche Börse (Xetra) and SIX Swiss Exchange. TER 0.29%.

iShares Physical Gold ETC (SGLN)
Backed by gold bullion held as allocated gold bars, valued daily at the London PM fix price. The gold is held securely in JP Morgan Chase’s London vaults. Listed on the London Stock Exchange. Total expense ratio (TER) 0.25%.

db Physical Gold ETC (XGLD)
Backed by a direct investment in physical gold conforming to the London Bullion Market Association’s (LBMA) rules for Good Delivery stored in secure vaults in London (JP Morgan and Deutsche Bank). Listed on the London Stock Exchange and SIX Swiss Exchange. TER 0.29%.

In the US, the dominant gold ETP is the SPDR Gold Shares (GLD), which is listed on the NYSE Arca and has assets of more than $31 billion. It has an expense ratio of 0.40%.

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