Yahoo Finance Gold: The best hope for beleaguered bulls
The gold rout accelerated in July, with the yellow metal hitting its lowest level since 2010 and suffering its worst monthly decline since 2013. Speculators are now net short gold for the first time since the government began tracking data in 2006, Bloomberg reports, and holdings in gold ETFs like the GLD are at the lowest level since 2009.
About the best thing that could be said for gold right now is that recent action shows signs of capitulation, which often occurs near major bottoms. But whether gold will find a floor or keep falling isn't the most important think, according to Juan Carlos Artigas, Director of Investment Research at the World Gold Council.
"What is really important is to think about the role for gold and what gold brings to investors," Artigas says. "The main purpose for gold in a portfolio is risk mitigation [and] diversification. Over a long period of time [gold] smooths out the ride for investors so whenever they need liquidity they are not only linked to the cycle of equities."
To his credit, Artigas has been consistent with this 'diversification' message -- he recommends investors hold 2% to 10% of assets in gold -- and doesn't make public forecasts on gold prices, saving him from the rhetorical jumping jacks other gold bulls have been doing lately. (Jim Rogers, who does forecast prices, told me in April that he'd be a big buyer if gold falls below $1000.)
"We don't focus on price forecasting, we try to better explain [gold's] role as a strategic asset," he says. That said, Artigas does offer his perspective on the recent decline in gold prices and why the consensus may be off on a few points.
According to the World Gold Council, four major themes explain gold’s recent decline:
A strengthening dollar amid an improving U.S. economy and expected Fed rate hike cycle.
A slowdown in China’s demand for gold.
A broad sell-off in commodities, thanks to the dollar's strength and concerns over China’s economic growth.
An easing of political tensions, specifically fears of a Greek exit from the eurozone.
In the accompanying video, Artigas explains why fears about China's gold demand are overblown, noting the People’s Bank of China increased its gold reserves by 57% since 2009 (albeit less than some forecasters expected) and that China said it is "committed to gold in various ways, including the support through the people."
In addition, he believes it's a mistake to lump gold in with other commodities, suggesting it trades more like a currency. "Gold demand in many key countries, including China, is not directly related to industrial consumption which drives demand for other commodities," Artigas writes in a recent research report. "In connect be directly linked to a country's pattern of consumption of commodities such as nickel, copper, sugar or livestock."
To that point, he notes gold -- despite its weakness -- has outperformed the Bloomberg Commodities Index year-to-date and is up 75% since 2000 while the index is flat.
Notably, Artigas didn't address Friday's disappointing employment cost index data or Thursday's downward revision to GDP for 2011-2014, which may cause the Fed to delay its rate-hike kickoff and halt the dollar's advance. That may be the best hope for beleaguered gold bulls.
Aaron Task is Editor-at-Large of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at atask@yahoo-inc.com.
