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With faint-of-heart out, gold poised for rally

Gold is pouring out of exchange-traded funds and Canada's main champion of precious metals investment is trimming his bullion holdings. Is it time to dump the yellow metal?

Probably not. A dispassionate reading of the evidence suggests that there are grounds for gold bugs to be optimistic about what lies ahead.

Consider the view of Gluskin Sheff chief economist David Rosenberg, one of Canada's most prominent market prognosticators. He believes the gold rush has just begun. Speaking at a conference in Chicago this week, Mr. Rosenberg reiterated his prediction that the spot price would soar from its current levels around $1,600 (U.S.) an ounce and reach $3,000 an ounce in the coming years.

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Mr. Rosenberg's bullish outlook is based on his belief in the steady devaluation of the U.S. dollar. He says that the massive expansion of the U.S. money supply by the Federal Reserve has been behind most of the S&P 500's gains since the depths of the financial crisis. Looking ahead, Mr. Rosenberg believes this money printing will dilute the greenback's spending power, and gold will climb in U.S.-dollar terms.

That all sounds rather persuasive – but it hasn't been enough to stop gold's swoon. The metal has fallen 12 per cent in price from its 2012 highs and global investors in exchange-traded bullion funds have been jettisoning their holdings. According to Bloomberg, physical gold held through ETFs has declined by 143 tonnes since Dec. 20.

Analysts at Société Générale and Goldman Sachs have both declared the end of the bull market in precious metals. Even Eric Sprott, Canada's loudest bull on precious metals, recently filed for regulatory approval to sell 379,000 shares of his bullion fund.

Look deeper, however, and the selloff isn't quite as bad as it appears. The 143 tonnes worth of physical gold selling sounds like a huge number, but represents a less dramatic 5.4 per cent of global bullion investment through ETFs.

There is also the issue of investor timing to consider. In any asset category, history suggests that a flurry of selling after a sharp price decline is far more likely to signal a recovery in price rather than further losses.

Short selling in Sprott Physical Gold Trust also suggests that the worst may be over for precious metals investors. (Short selling occurs when investors borrow shares and sell them on the market with the intention of buying them back later at a lower price.)

The short interest in Sprott Physical Gold Trust rose from almost zero in November to more than 100,000 shares during December. Since that time, short interest has declined along with the fund's unit price and is now back at minimal levels. The current low levels suggest that downward pressure on the share price from short sellers is coming to an end.

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To be sure, the concept of fair value as applied to gold will always be contentious. Bullion does not generate earnings or cash flow. It's not consumed, so demand for gold is categorically different than demand for crude, copper or iron ore.

That's why bullion is best understood as the anti-currency – a haven that investors flock to when government-backed currencies fluctuate.

Bullion's price will move in the opposite direction to the U.S. dollar and faith in global central banks. And that is as likely to be down as up over the next few months.

Editor's Note: An earlier online version of this article incorrectly stated the number of shares in his bullion fund that Eric Sprott filed for regulatory approval to sell. This online version has been corrected.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More


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