Commodities investing: the gold standard

The recent period of global economic uncertainty has had a mixed impact on the precious metals sector.

In August, fading equity prices sparked demand for gold, causing a steady, month-long price climb as persistent signs of a weakening global economic recovery reignited the metal’s appeal following a lackluster July.

Subdued inflation and the rising US dollar provided no meaningful direction in gold pricing.

Instead, investors generally grew increasingly skeptical about US Treasuries as a perceived “safe haven” and priced in their concerns over the potential longer-term debasement of the US currency.

Gold’s spot price reflected this discomfort, advancing by 5.6 per cent — its best month since April — and more than covering July’s 4.9 per cent decline. Demand for gold exchange-traded funds and jewelry remains robust.

Gold is in the midst of its longest rally — at nearly 10 consecutive years — in at least nine decades. Silver followed a similar path in August, with spot prices appreciating 7.6 per cent.

Prices of palladium, still the best- performing precious metal over the past year, advanced 1.0 per cent in August, lifted by increased demand from car makers and the continued depletion of Russian stockpiles that were accumulated during the Cold War.

Platinum was the sole decliner of the four primary precious metals in August, in part because auto-industry users switched to palladium due to its lower price.

We still believe there is meaningful investment opportunity in precious metals, as they can be an effective diversification tool in an overall portfolio strategy as well as a hedge against inflation, which appears to be a real possibility in light of loose monetary policies around the world.

As we look at the landscape over the next couple of years, we continue to see a lot of uncertainty, so it makes sense to us to own some gold over the long term.

We anticipate that there is still potential for further increases in gold prices. For example, China has stated in press reports that it plans to continue building its reserves, which remain low compared to the western world.

India has also stepped into the market, buying 200 tonnes of International Monetary Fund (IMF) gold back in November 2009.

In addition, consumer demand for gold jewelry in these countries has further strengthened gold’s popularity.

We continue to see Russia acting as a large buyer of gold and adding to its reserves.

Russia was one of the few European countries to see a rise in demand for jewelry for the August year- over-year period, adding to the precious metal’s appeal.

These are examples of several major economies that continue to push up demand for gold, supporting our view that gold prices could continue to rise.

There is no question that gold is still vulnerable to market downturns, but the appeal of gold is its historically low correlation with the overall markets.

It should be noted that at Franklin Templeton, our investments are in gold equities through companies that tend to mine gold, not in gold bouillon.

The same is true for other precious metals that we invest in through our funds.

The current environment of high precious metals prices provides what we regard as an excellent backdrop for companies to potentially create shareholder value through improving profits, reserve additions, new mine developments and successful exploration.

The writer is Vice-President, Portfolio Manager and Research Analyst, Franklin Equity Group

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