We just received the latest edition of Gold Investor (very good job Mr. Juan Carlos Artigas). The core message of the publication is that gold is affected by many factors and that the simplistic relationships of the past no longer apply. For instance, when US interest rates go up, gold goes down, or when USD goes up, gold automatically goes down in the same proportion. The interconnections are very complex nowadays and other variables are worth considered:
1. Currencies: Is the Chinese RMB going to step forward to the front line? We think so, in fact it has already started doing it (more trade agreements paid in yuans). Also by next fall RMB could be part of the new SDR (basket of currencies created by IMF, link here). In that case it might be a good idea to hold more gold to make the movement more serious and appealing. On the other hand, with so much increase of the World's money supply, it makes sense for central bankers to keep some reserves in gold.
2. Inflation/deflation: Just a quick note here, gold behaves pretty well when a deflationist scenario appears (worst than cash but better than most of the assets).
3. Supply/demand: Check the following charts so that you can see that not only investors or central banks trade this metal. 60% comes from jewelry and industrial uses. Also we all tend to think locally, however when you think of gold you have to think of India and Asia, and they don't have our same perception.
4. Black swans: We believe that while things have been normalizing, the tail risk is getting wider and more dangerous. Closing of financial entities will keep on having in the future. It seems we are living in a house of cards. To have some assets outside the system might make sense as well.
The price of gold is collapsing, some say because the FED might increase interest rates. Relaxed investors such as Jim Rogers keep slowly buying even though they are not sure of the floor in price (it might be 800 USD/ounce!!) only to hedge the rest of their portfolio. Imagine for a second that the FED increases the rates, bonds inmediately will suffer a lot and they will be substituted by another non-correlated product... Gold perhaps?
A lot of complexity to make a proper forecast ONE WAY OR THE OTHER. Our proposal has always been to create a group of uncorrelated assets to lower volatility, we don't try to time the markets.
