Gold Price Does Not Affect Diversification Benefits, Sharps Pixley Posted by James Randolph on July 11, 2012
July 11, 2012 – Precious metals trader Sharps Pixley, based in London, states investors continued to gain from gold as an asset despite the volatility in price that has been apparent in markets over the past month.
Prices on the US COMEX gold futures market have mainly seesawed since mid May, realizing no true gains or losses. Following a surge in gold price of 4.6 percent from 28 June to 3 July, gold futures have again fallen $42 to $1,579.80 per troy ounce as of Tuesday. Broader markets associated with risk have also had questionable performance with the S&P and Stoxx 50 fallen 2.4 percent and 3.4 percent respectively, the currency pair USD/EUR down 2.8 percent, and the CRB Commodity Index down 1.4 percent. As a contrast, the Dollar Index surged nearly 2 percent while the US 10-year Treasury Bond rose around 13 bps.
During the month of June, the US added 80,000 nonfarm employees to employer payrolls, well under market projections of 100,000, but enough to keep the unemployment rate unchanged at 8.2 percent. The government of the People’s Republic of China cut interest rates twice in a month as slowdown became more apparent in the Chinese economy through moderating inflation, falling imports, and larger trade surpluses. The Chinese Premier Wen said investment growth would need to be supported in China, arousing expectations of stimulus in Chinese markets.
The governor of the European Central Bank may also lower rates yet again following the rate cuts that were announced last week at the conclusion of the latest meeting of Eurozone leaders. The EUR/USD pair dropped to a two-year low at 1.2250 in currency markets on Tuesday on the rate cuts and anticipated delays in the European bailout fund, despite plans for the rescue funds to flow directly to Spanish banks during the current month. The sentiment created by the Eurozone has produced a drive toward safe-haven asset investing, but investors have moved towards the US dollar instead of towards gold, limiting the upward movement of prices.
The World Gold Council on 10 July dropped its estimate of 2012 Chinese gold demand from 1,000 tons to 870 tons, stating the stronger dollar and the hold up in gold price rallying have decreased the desire to buy gold for consumers. Thomson Reuters GFMs Ltd. sees Chinese demand over 900 tons in 2012, a rise of 16 percent year on year. Chinese gold demand is still strong, with May gold imports from Hong Kong into China rising six fold over a year ago to 75.6 metric tons.
The World Gold Council recently released research under the title “Gold as a strategic asset for UK investors,” which cited that a small gold allocation between 2.6 percent and 9.5 percent improves portfolio performance on a long-term basis and reduces losses during the most difficult market periods.