Gold Update June

May 25, 2012

The World Gold Council recently published its statistics for global gold demand and supply relating to the first Quarter of 2012.  It appears that demand was softening across the board except for investment flows as demonstrated by increases in prices in gold ETFs in the first few weeks of the year (such ebullient action has been reversed and figures for Q2 may not be as favorable).

One constant positive trend is continuing buying from Central Banks. In Q1 2012, they purchased over 80 tonnes of gold representing 7% of total demand.  This trend continues to be the fundamental change from years of official sales which dampened prices for two decades.  A renewed need for currency diversification and an expanding amount of foreign exchange reserves (as reserves increase significantly, Central Banks need to increase gold positions to keep the ratio to other currencies constant) seem to keep Central Banks on the buying side.

Another positive came from China which showed an increase in demand at different levels: jewelry (up 8% year on year), record retail demand due to their local New Year holiday, and inflation hedging.  While China produced positive demand growth, unfortunately, the other significant global buyer, India, showed some retracement especially in investment demand down 46%.

One interesting new element is related to the European debt mess.  A new proposal is circulating on the formation of a European Redemption Fund as a measure to circumvent the hostility toward issuing common Euro bonds and yet achieving similar common debt guarantees.  Such fund would be backed by gold held by the Euro zone countries which will exchange some of their national liabilities (probably up to 60%) for the new commonly guaranteed paper. Such fund would not be permanent and should be in existence for up to 25 years.  It is hard to guess its probabilities of success but more and more rumors are being generated over some kind of common solution.  Not knowing how this would eventually be resolved, it is hard to make a prediction on its influence on gold prices but I would dare to say that it should have long term positive ramifications for the yellow metal.

When looking at gold performance, we usually tend to focus on the metal itself; however, at this juncture it may be interesting to take a look at gold mining stocks as well.  The performance of commodity and related stocks is often plagued by large tracking errors as stocks can be influenced by many variables that are not necessarily linked to the commodity itself.  This was certainly the case in the last few years with gold miners; the group tremendously underperformed gold since 2007.

While GLD is up about 130% for the period (even after the recent sell-off), the XAU index is only up 20% (while the SP500 is down almost 20% for the same period).  In light of what we expect to be a mixed performance for gold in the foreseeable future, it may be a good idea to diversify the exposure in gold stocks as well; they seem to represent value and pay an average dividend of just above 2%. 

In other words, gold volatility should be expected to continue and therefore any long precious metal exposure should be option hedged and possibly mixed with yield producing stocks.

Disclaimer: PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THEREFORE, NO CURRENT OR PROSPECTIVE CLIENT SHOULD ASSUME THAT FUTURE PERFORMANCE OF ANY SPECIFIC INVESTMENT AND/OR INVESTMENT STRATEGIES MADE REFERENCE TO ABOVE AND RECOMMENDED OR UNDERTAKEN BY CERVINO CAPITAL MANAGEMENT, WILL BE PROFITABLE OR EQUAL THE CORRESPONDING INDICATED PERFORMANCE LEVELS. DIFFERENT TYPES OF INVESTMENTS INVOLVE VARYING DEGREES OF RISK, AND THERE CAN BE NO ASSURANCE THAT ANY SPECIFIC INVESTMENT WILL EITHER BE SUITABLE OR PROFITABLE FOR A CLIENT OR PROSPECTIVE CLIENT'S INVESTMENT PORTFOLIO. HISTORICAL PERFORMANCE RESULTS FOR INVESTMENT INDICES AND/OR PORTFOLIO BENCHMARKS DO NOT REFLECT THE DEDUCTION OF TRANSACTION AND/OR CUSTODIAL CHARGES, THE DEDUCTION OF ADVISORY MANAGEMENT FEES, NOR THE IMPACT OF TAXES, THE INCURRENCE OF WHICH WOULD HAVE THE EFFECT OF DECREASING HISTORICAL PERFORMANCE RESULTS.
HYPOTHETICAL RISK DISCLOSURE: HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN, IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.