Financial Professionals

Insights

A New Perspective on Gold from Euclid Advisors

06/06/2014

Market insights from the international investment professionals at Euclid Advisors:

Gold (and gold mining equities) have been struggling recently after a big start to the year; however, we feel the asset class is not to be overlooked within a portfolio context. We believe the geographical thrust in the demand for gold has shifted from the West to the East.

Through the 2008 financial crisis, the demand for gold from Western sources was strong, with much of that demand funneled through ETFs.  As gold prices declined, the ETFs were sold, and, so they reduced their gold exposure. The basis for Western demand was primarily financial, with investors drawn to the yellow metal as a store of value without wanting to deal with the headache of taking physical delivery, storage costs, and so on.

Now, the physical demand for gold is strong, and we believe it is more Eastern-based, particularly from China and India. Indians like gold as a matter of taste, buying it for a multitude of reasons – as a store of value, for jewelry, as a hedge against inflation, and as a sign of prestige.  The Chinese are more recent adherents. In fact, China has supplanted India as the largest buyer of gold.

There are a couple of reasons behind China’s growing gold interest.  First, China’s central bank wants to diversify its $4 trillion in foreign exchange reserves.  While they cannot do much of that in the gold market because the market is not big enough, they can add to their holdings on weakness.  Second, it is commonly held that Chinese citizens are buying physical gold to get around the limitations in how they can invest.  It appears that due to government-imposed capital controls, the Chinese are using many commodities, including gold, to get value out of the country by having overseas vendors inflate invoices so the Chinese have a “reason” to send more value abroad. China’s property market is clearly not attractive. Its stock market has not been helping. The economy is slowing. Pollution is a cause for worry.  Where else can the Chinese invest?

In our view, these factors point to continued strong physical demand for gold which, in turn, should help stabilize its price. In addition, gold mining stocks are still trading at very depressed levels from just a few years ago; in some cases below their NAV, with cash production costs below the current spot price. From our perspective, the potential opportunity in gold warrants further attention from investors.

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.