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25 December 2008 at 19:30 IST
Gold, the star performer of 2008!
Commodity Online When prices of most commodities slumped due to global credit crisis, precious metals were the best performing group in 2008, according to an analysis by ETF Securities.
Among precious metals, Gold was the the star performer, holding steady in USD terms while most other asset classes, such as equities, crashed. In GBP and EUR terms the spot gold price rose by 40% and 21% respectively.
Extreme financial market volatility and risk aversion since September has underlined precious metals attractiveness as a safe haven asset and event hedge. Despite a cumulative return over the past two months of -11%, the DJ-AIG Precious Metals Total Return Sub-IndexSM (comprised of Gold and Silver) has outperformed most other asset classes since the credit crisis has intensified (with the exception of government bonds).
There has been a strong uptrend in net inflows into ETFS Physical Gold (PHAU), Gold Bullion Securities (GBS), and ETFS Physical Silver (PHAG) products since August despite even during periods when prices were falling.
The inflows suggest that physical precious metals remain in strong demand from strategic investors seeking safe havens from the financial crisis and longer term portfolio insurance.
The prospect of sharp near term falls in global demand has weighed heavily on precious metals with significant industrial applications – notably platinum and palladium. Platinum and Palladium have underperformed the DJ-AIG Precious Metals Total Return Sub-IndexSM by 31% and 39% over the past year.
In contrast precious metals with lower exposure to the business cycle - particularly gold – have tended to outperform other metals in the current economic downturn. Gold outperformed the DJ-AIG Industrial Metals Total Return Sub-IndexSM by 85% over the past 12 months.
The spot gold price has been flat in US dollar terms over the past twelve months, substantially outperforming nearly all asset classes other than high-rated government bonds. In GBP and EUR terms the spot gold price rose by 37% and 18% respectively.
Key drivers of the gold price outperformance this year are rising investor risk aversion as the financial crisis has deepened and as large central bank liquidity injections and rising government debt levels have led to concerns about currency risk. It is interesting to note that the gold price increased 4% between mid- September and the end of November, despite an 11% USD/EUR appreciation over the same period.
Sharply falling interest rates have added to gold demand. With interest rates on US Treasury bills approaching zero, gold is viewed as a potential higher return/low risk asset substitute to Treasury bonds.
The gold price has substantially outperformed most asset classes over the past five years with a cumulative return of 105%. Although some other commodities have had higher returns, those returns have come with much higher volatility.
Gold stands out as having one of the highest-risk return profiles (as measured by the Sharpe ratio) across commodities and asset classes.
Stagnating long term new gold supply should provide support to gold prices in the medium term. Mine production has been in decline since 2001 with 2008 production hit by a halving of output in Indonesia. Meanwhile physical demand for gold hit a record high in 3Q 2008. Rising production and exploration costs have substantially increased the marginal cost of production.
Low government sales are another price supportive factor. GFMS forecasts that net official sector gold sales in the second half of 2008 will fall almost two-thirds year on year, taking net sales to their lowest level since 1995, ETF Securities said.
NCDEX GOLDJUN2012 04 June 2012
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