Will gold shine for the private investor in 2014
If the first quarter of 2014 was anything to go by, gold could prove an interesting investment opportunity this year. We’ve already seen values recover from the sell-off of 2013 to register strong gains since the start of the year.
Will gold shine for the private investor in 2014
If the first quarter of 2014 was anything to go by, gold could prove an interesting investment opportunity this year. We’ve already seen values recover from the sell-off of 2013 to register strong gains since the start of the year.
Sucden Financial Private Clients sees this as a response to uncertainty regarding Chinese economic growth, problems in emerging markets, US monetary policy and the Russia/Ukraine issues which sparked safe haven buying.
However, the somewhat calmer West versus Russia rhetoric and perceived stability in Ukraine following May’s decisive election result, along with hints from the Fed that higher interest rates may come sooner than expected, saw gold give back some of its gains again. We came into the year trading at $1,205, hit a peak of $1,391 (+15.4% on the year) and it stood at $1,255 as of the 30th May (+4.1% on the year).
An age-old favourtite
Gold has been a global investment favourite for centuries, but in recent years the appetite for gold has really accelerated. Interestingly, the current second biggest global producer is China, who produced 430 tonnes in 2013. China also happens to be the largest consumer of gold, consuming 1190 tonnes in 2013.*
Chinese Gold Rush
Source: Chine Gold Association
The Wall Street Journal
The Wall Street Journal
China has replaced India as the top consumer of gold, yet despite the Indian government’s attempts to shrink demand by imposing import duties, India’s love affair with the yellow metal continues, consuming 975 tonnes in 2013*. This is mainly for Jewellery which is traditionally given as wedding gifts and also is widely purchased as gifts during the Diwali season in the Autumn.
China’s appetite for gold continues to rise despite rise in price.
*source: World Gold Council
Together, China and India accounted for 53% of global physical demand last year, although other Asian nations are also getting in on the buying spree — Thai and South Korean purchases rose 73% and 37% in 2013.
Global jewellery demand increased 17% last year, according to the World Gold Council, amounting to 2,209.5 tonnes. Gold bar and coin investment leaped 28% during 2013 to 1,654.1 tonnes, the highest-ever recorded total. All this points to increased demand and potentially higher prices for gold.
Ways to invest in gold
Future and Options
Futures and Options are an effective and relatively simple method to invest in gold. Not only do Futures and Options give investors the ability to capitalise on a rise in the price of gold, they also offer investors the ability to benefit/protect themselves from a fall in the value of gold, as they allow you to take ‘short’ positions.
Sucden Financial Private Clients offers Futures to suit most investors’ pockets, starting from the Micro Gold contract which is 10 troy ounces, to the Mini Gold contract at 33.2 troy ounces and the Full Size Gold contract which is 100 troy ounces. To put it in to monetary terms for when trading these contracts, a $1 move in the price of gold results in a $10 profit or loss on a Micro Contract, a $33.20 profit or loss on a Mini Contract and a $100 profit or loss on a Full Contract.
Normal Full Size Gold – 100 troy ounces
This is the most popular contract with investors. It offers high liquidity up to 9 months forward and the ability to trade contracts more than 5 years forward, although there is less open interest and spreads will be slightly wider.
A Futures contract is a straight forward exposure to the price fluctuations in gold. If you buy one normal full size contract at $1,280, you are long 100 troy ounces. If gold rises to $1,285 you make $500, as gold is priced per troy ounce and you are long 100 troy ounces. If gold falls to $1,275 you lose $500.
An investor can also short these contracts with Sucden Financial Private Clients, enabling you to potentially make money when prices decline. For example, if you held physical gold and thought that gold may be in for a fall in price, you could sell a Futures contract short against it. If gold falls from $1,280 to $1,250, you make $3,000 as it has fallen $30 per troy ounce held. The profit you made from your Futures sale will help offset the losses in your physical gold holding. On the flip side though, if gold rallied to $1,300 you will lose $2,000, but this is offset by the gain in your physical holding.
There is also the possibility of trading Options on the Futures contracts, which can be used to speculate on price movements or protect an existing position. These are very liquid and trade freely up to around nine months forward, with less liquid Options available as far out as Dec 2019.
Options give the buyer the right to buy or sell the underlying asset at an agreed price for which a premium is paid. The right to buy is known as a Call Option, and it gives you the right, but not the obligation, to buy at the strike price. The right to sell a contract is known as a Put Option and this gives you the right to sell a contract at a given price, but again, not the obligation.
The premium paid is the most an investor can lose when buying options. This enables an investor to calculate their maximum downside risk when entering a trade. You can also sell options as an opening trade, for which you would receive the premium, but you have effectively unlimited risk should the price keep moving against you. Speak to one of Sucden Financial’s Private Clients team to find out more about trading gold futures and options on 0203 207 5690, or click here to find out more.
* A ‘bear market bottom’ is a phrase used to describe when an asset that has been falling a lot (in a bear market) like gold did last year, starts to flatten out and form a ‘bottom’ and start to rise again as in the diagram above.
Gold Shares
Gold shares tend predominantly to be in gold mining companies, and despite gold’s price improvement the mining sector has struggled as a result of rising production costs. Some feel though that gold shares have put in a ‘bear market bottom’* and could make an interesting investment should gold prices continue to rise.
Exchange Traded Funds (ETFs)
ETFs are funds that track indices, securities or commodities, like gold for example, and are traded on an exchange. They offer an effective way to gain exposure to gold’s movement without needing to invest in the physical.
The most popular Gold ETFs are the SPDR Gold Shares and iShares Gold Trust which are backed by gold bullion stored in vaults. These have gained over 4% and 6% respectively, year-to-date, on the back of the rising gold prices. However, there are many different ETFs to consider and some trade gold shares and some have little or no real asset value in that they are based on derivative products and not physical bullion. Make sure you do your homework, or call Sucden Financial Private Clients so you know exactly what it is you are investing in.
Prospects for 2014
The large swings already seen this year certainly prove nothing can be taken for granted in this or any other market. Some analysts believe however that Gold could have a good year and prices could exceed $1,400-1,450 if global events unfold as predicted. In the interest of balance though, here is a quick summation for the upside, bullish view and the downside, bearish view.
For the bulls
The SPDR Gold Shares ETF has seen holdings increase from 794.6 tonnes on 2nd January 2014 to 821.4 tonnes on 24th March 2014. Central Banks are now net buyers as they bid to rebuild holdings sold in the preceding 5 years. The Ukrainian situation will rumble on for some time. Chinese growth will remain in question for the foreseeable future. Interest rates and inflation look like staying “low”.
We believe the most bullish influence however will be US monetary policy, or lack of it. If the US raises rates too early they could kill growth and we cannot see this happening. In fact we would be surprised if there is any change before the last quarter of this year and most likely next year. The US remains the only major western country that has not attempted to reduce its deficit, something they will have to do at some stage. When they do take their own advice, the dollar should fall, which should see gold rise in value (as the dollar falls in value, gold becomes more attractive to international buyers.)
For the bears
If the US continues with its current economic policy the dollar will remain strong and the Russian threat to Europe’s well-being will weaken the euro and possibly the pound. If the US and the Chinese do successfully stimulate their economy and get back on track, Wall St will continue to gain ground. This would make the demand for gold’s safe haven status less attractive and we could see a slide back towards the $1,200 level, last seen at the end of 2013.
So, if you think gold will glisten or lose its lustre, speak to Sucden Financial Private Clients. Our experienced brokers will be happy to explain the products and trading strategies outlined above. Make your investments shine in 2014 with a Sucden Financial Private Clients account.
Sucden Financial is one of the world’s leading brokers of commodity and financial derivative products, including Futures, Options, Commodities, Equities, CFDs and FX. We provide access to more than 25 exchanges around the world through professional-level trading platforms and a dedicated telephone broking service.
Our history goes back more than 40 years and in that time we have developed an enviable reputation for expertise, service and reliability. We are authorised and regulated by the Financial Conduct Authority (FCA) and are members of major worldwide financial exchanges. Trading Futures, Options, CFDs and Forex involve trading on margin and as such are high risk products.
Please click here or call our Private Clients team on 0203 207 5690 to find out more.
