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Thursday, November 15th, 2018 - Buy Gold - Bringing you trusted gold news and gold investing information since 2006

Is Gold Still Buyable? Simple Answers to Simple Questions

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 (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 the portfolios significantly improved the performances while reducing the portfolio’s 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 European Debt Crisis and from Deflationary concerns to Middle Eastern crisis. It has been extremely volatile and uncertain time period during which investors rightly turned towards precious metals as safe haven. We feel that this cycle of crises is likely to continue, albeit less strongly, in the future periods. There is certainly some room for precious metals in the portfolio as a protection

  • The Asian Demand for Gold is real and it is likely to drive up the price of Gold upwards in the future periods

Central bank gold holdings continue to be concentrated in the Western world, with the US and euro area 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 medium. 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 at least 100 tones of Gold. This will be real demand driver

Q2. Compared to other Precious Metals, Stock Markets 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

First of all, from a historical point of view, Gold has not yet reached its all time high in real terms. The real time high for Gold in real terms was in 1980 when the Gold price reached $1850/oz following the Iranian revolution.

    • 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

* Link to the CFA Study: http://www.cfainstitute.org/about/press/release/Documents/precious_metals.pdf

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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