Last week we showed how the price of gold has gone hyperbolic. Given the rise, we thought it would be useful to touch base with some of Covestor’s model managers who run portfolios that hold the SPDR Gold Trust ETF (NYSE: GLD), the world’s largest gold ETF. One such manager is Peter Kurata who run's Covestor's CANSLIM model. We asked Peter for his thoughts on gold as it marches higher and what events might cause him to exit the position. His answer:
Throughout history, precious metals such as gold, silver, and platinum have been considered smart long-term investments in times of financial or political crisis. Such investments also help preserve wealth and buying power unlike fiat currencies, or money declared by a government to be legal tender. We have been in a financial crisis since 2007 as seen by massive, worldwide government stimulus programs and the Federal Reserve in the U.S. Moreover, gold supply from mining decreased 2001 – 2008 (Figure 1), while demand more than tripled (Figure 2).
While supply and demand are factors influencing gold’s long term pricing trend, central banks influence shorter term price fluctuations. Leased gold, gold swaps, or selling gold from the central bank treasury vault are methods used to keep the price stabilized.
The worldwide financial crisis is the back drop to higher gold prices. Many, including myself, believe the crisis will get worse. Bill Gross of Pimco believes, “the U.S. will likely default on its debt; not in conventional ways, but via inflation, currency devaluation and low to negative real interest rates.” Increasing demand and restricted supply will keep the long term price trend up. Even central governments, who now work feverishly to keep the price down, are becoming buyers as they see their fiat currencies devalue.
"Skunked" William Gross. PIMCO, 4/11. http://www.pimco.com/EN/insights/pages/skunked.aspx