Safe Haven Gold? The Real Question
Friday, 10/18/2013 15:21
Looking for a safe haven in gold hurt investors in 2013. So...?
GOLD has proven anything but a safe haven for investors this year, believes John Hyland CIO of
United States Commodity Funds.
Here, speaking with
Hard Assets Investor's sister-site Index Universe, Hyland explains why he thinks gold isn't a safe haven and why it's not even a commodity.
IndexUniverse.com: What's your take on gold as a currency versus a commodity?
John Hyland: I think the preponderance of evidence is that it's clearly a currency or a monetary device. Production and consumption, which are obviously key to any physical commodity, are just minor parts of the gold story. It's not really consumed. So I think it's a monetary device.
IU.com: Is gold really a good hedge against other asset classes?
John Hyland: There are a few reasons why you might want to hold gold. And then the question is, are there better things you could hold other than gold? Otherwise, don't hold gold at all.
There are a couple of commodities that actually have stronger correlations to inflation and strong long-term, positive real return, real price appreciation. Crude oil is a better proxy. Platinum is a better proxy. Tobacco is a better proxy, although difficult to access as an investment category unless you buy a tobacco company.
If I were worried about inflation, I don't think I'd use gold; I think I'd use a basket. If you're worried about monetary disruption or financial crisis, gold might pop if there's some repeat of 2008. But I think I'd almost prefer a far-out-of-the-market option like on the S&P 500 than to actually own gold.
Then, if you really go to the far extreme of a breakdown in public order, why would you want to own gold? Wouldn't you be better off owning boxes of 9 millimeter ammo? I think the benefits of gold tend to be oversold. I think you could do a better job, depending on which of the two or three risks you're worried about with other vehicles.
IU.com: Do you think gold is a safe haven for investors? And do you agree with Nouriel Roubini's forecast that gold will go down to around $1000 per ounce by the end of next year?
John Hyland: I don't think you can describe something as volatile as gold as really a safe haven. Something that can rise and fall 30-40% in a fairly typical year I would describe more like an option. So the question is, on a price-effective basis, is it a good option? I don't know.
Roubini could be completely right, and I wouldn't be surprised at all. He could be completely wrong, and I wouldn't be surprised either. I don't know what to expect from gold. But it's very difficult to figure out what's fair market value for gold. All I know is that if I'm buying my wife jewelry, the price always seems too high.
IU.com: Dennis Gartman has been saying recently he'd rather play gold in Yen terms as opposed to in Dollar terms currently. Do you go along with that?
John Hyland: Isn't that the same thing as saying you should just be short the Yen? Honestly, what does gold have to do with it? Because the only difference in being long gold in Yen terms and [just] being long gold, is that you're also short the Yen. So why don't you just short the Yen? What does gold have to do with it? So if he wants to come out and say "short the Yen," all right, go short the Yen.
IU.com: What did you expect from the Fed regarding tapering? Did it meet your expectations? And in light of the announcement on Sept. 18, and based on the slowdown in China, what's your outlook for commodities?
John Hyland: I expect the whole unwinding of QE to take longer than people thought. We're in the midst right now of trying to get a new chairman, so that probably suggests that nobody is really going to want to run out there and take any bold steps.
Janet Yellen is not going to be in any hurry. So I think when the market crashed and the economy crashed in late 2008, people said, "When do you think it will get better?" I said, "Like five years." I think it's the one thing that everybody gets impatient for.
Regarding China, people are probably at this stage of overthinking the China equation. I think a fair amount of that is already in the pricing. The price of a lot of these commodities had already fallen because people expected that China was becoming soft. That means that there may be more opportunities that there will be surprise the other way in China, and that Europe will stabilize and actually start producing more, therefore consuming more raw commodities.
The US is trundling forward, slowly but surely. Japan is kind of a wild card. People forget how big an economy it has. It wasn't that long ago that Japan was bigger than China. And yet now everybody kind of figures, well, if China is slowing down to merely 6%, it's the end of the world. But Japan's economy is roughly the same size.
So I think that after falling largely for the last two years, the commodity market has adjusted to the assumption that China's not going to grow 7 or 8%.
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