Gold price over $1,200 has bullion buyers sure rally will continue

Bad news for stock markets is often a good time for one of the world's oldest commodities, and this year is no exception as gold has rallied almost 20 per cent since the start of 2016.

The price of an ounce of gold bullion has risen from a little over $1,000 US an ounce in late December to above $1,200 US Thursday, through a period when every single major stock index has fallen.

That's part of a widespread flight to safety that has seen investors dump anything perceived as risky — stocks, oil and currencies like the Canadian dollar — and put their money into investments that are perceived to be safer.

That's leading them right to gold, which is gaining ground after a multi-year slide.

"Investors are suddenly waking up to the risks in the market, pretty much like what happened in 2008," said Robert Cohen, a portfolio manager at Scotiabank's Dynamic Funds.

Mini-rally underway

"This time it's more of a slower motion train wreck out there, so people are slowly digesting that information and systematically moving to safe havens like gold."

Part of gold`s rally is due to a relative dearth of better options. That's because central banks have cut interest rates so low that non-risky assets now can`t outperform inflation.

Bloomberg recently reported that almost a third of all the sovereign debt held by developed economies is negative yielding. That`s more than $7 trillion worth of assets guaranteed to lose money if held to maturity. Against a backdrop like that, it's not hard to see gold's appeal.

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Even the banks themselves are buying in.

According to lobby group the World Gold Council, last year saw the second-highest amount of gold bought by central banks in at least 20 years, as countries such as Russia, India and China bolstered their reserves. Central banks added 336 tonnes to their reserves in the second half of last year, a 25 per cent increase from the previous year. And that comes at a time when actual output from gold mines dropped — a recipe for higher prices

Nobody has as much gold as Uncle Sam. The U.S. has the added benefit of being the home base of the currency in which gold is priced: U.S. dollars.

As it happens, gold and the Canadian dollar peaked at around the same time in late 2011 at around $1,900 US an ounce and $1.06 US, respectively. While the loonie has dropped by about a third against the U.S. dollar from that peak, gold priced in Canadian dollars has only dropped about 11 per cent in the same period, trading at about $1,658 Canadian per troy ounce on Wednesday.

Cohen said it's often foolish for Canadians to price gold in U.S. dollars while they price everything else they buy in Canadian.

"Certainly if you look at your house price in USD, it may have gone down in price over the last year," Cohen said.

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Many gold watchers think the stage is set for bullion to take aim at all-time highs. Citing investor fear that's currently pervading the market, "gold could not only reclaim $1,800 to $2,000 an ounce but actually move substantially higher," said ABC Bullion's chief economist Jordan Eliseo in an interview with the Australian Broadcasting Corp.

"Looking ahead, one can be cautiously optimistic about the gold market."

While many so-called gold bugs pretty much always think gold is the best way to get rich quick, some of the so-called smart money considers it to be more of a "store of value" — that is, a place to preserve savings safely.

"It is a bit of an insurance policy against an upset in the broader financial market," said Scott Vali, portfolio manager of Global Resources at CIBC Asset Management. "I think that's the way it should be looked at. Insurance policies generally don't earn you a return. They're there in case something goes wrong."

One Toronto company agrees with that view, building a business model based on the notion that gold behaves more like a currency than it does like other investments.

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"It's more like a savings account," says Josh Crumb, the co-founder of BitGold. "We pitch it as a store of value, not the fear trade that's happening out there now."

Crumb, a former senior metals strategist at Goldman Sachs, says he saw a market niche for the service his company provides once central banks started moving to negative interest rates. "Even if you wait it out, you're now guaranteed to lose capital," he said in an interview.

How it works

BitGold functions a lot like an online bank, allowing customers to buy and sell real gold to each other. The gold is stored in one of the company's vaults around the world and can be withdrawn at any time, with withdrawals picked up in person or sent through the mail.

BitGold takes a commission of one per cent of the spot price at the time for facilitating the transaction and caters to the growing market of access who want easy access to small amounts of physical gold.

Crumb says many of his employees take part of their salaries in gold, not to get rich quick but rather as a hedge against what's happening in other parts of their portfolios.

"Regardless of what central bank policies do to the economy, what we know for sure for now is they're bad for Canadians who want to spend money overseas."

Crumb doesn't offer a view on where the price of gold is headed in the short term, but says he's confident there will always be a healthy demand for it.

"Gold actually never makes you rich: all it does is protect the value you have," he said. "Which is why gold works as an investment whether people believe in it or not."