Posted by: Dr Churchill | August 3, 2015

Art vs Gold

High quality gold Investors are shifting quietly and quickly to a far more liquid capital investment medium…


Yes Art…

How radical is this…

And it is not only because gold has been a disappointing investment as of late.

Of course this should come as no surprise to anyone in the investment world.

The fact that this has occurred in the context of developments that would normally push gold prices higher is what makes this case of a “Gold Flu” far more notable.

But the most consequential hypothesis of all is that gold may be losing its traditional role in a diversified investment portfolio.

To say that gold has underwhelmed investors over the past couple of years is an understatement.

For once Gold did not participate in the surge upwards swings in nearly all financial asset prices; and it has not provided protection in the more recent downturn in risk markets.

So what good is Gold for?

Headlines like these are not really helping the yellow hoarders either and of course they are not scaring anyone anymore:

Gold in major slump…
Gold flies from safety…
Gold is No longer a Hedge…
Gold is Bankrupt…

And maybe these Kassandras are all right because throughout this recent period, gold has not benefited from neither the rock-bottom interest rates that compensated for one of its major disadvantages as a financial holding, namely, that gold holders do not earn any interest or dividend payments — nor from it’s sensitivity to multiple geopolitical shocks, such as the Chinese oversized giant Balloon burst of it’s Capital Markets, not from Greece’s Eurozone exit-related concerns, nor from the generalized and oversized problems of the European Union as a whole stemming from the single European currency, nor from the massive injection of liquidity by central banks, nor from the prospect of Chaos, should the Iran deal doesn’t get ratified inside the Congress and the Senate of the United States of America.

Indeed the performance of gold has been so dreary as to encourage a growing number of hedge funds to bet against the yellow asset, notwithstanding its price decline of 8% year to date, and 16% over the past 12 months. Indeed, positioning reports point to large shorts deployed throughout the civilized Capital markets.

Several reasons may be advanced to explain these historical anomalies. They suggest that while cyclical factors have played a role, the main drivers are much more structural and secular in nature.

First, investors have found more direct ways to express their views about the future, particularly in a world in which central banks have had such an important influence on asset prices — from the explosion in equity exchange traded funds globally to the deepening of interest rate and credit products.

Second, gold has become a lot less attractive to investors as a result of the lack of meaningful inflationary pressures. It has also suffered from the more general decline in interest in commodities among institutional and retail investors, due in part to slower global growth.

Third, gold faces the growing risk of lower demand from central banks, once deemed reliable core holders. Part of this is driven by the fall in holdings of international reserves by the emerging world, particularly as they try to cope with the impact of lower commodity prices.

Fourth, as historical correlations have broken down, the analytical case for investing in gold has been increasingly challenged. In particular, prices have failed to respond positively to some notable geopolitical shocks, eroding the metal’s attraction as a diversifier and risk mitigator.

Fifth, the main drivers of most asset prices — namely, liquidity injection by central banks and the deployment of some of the large corporate cash holdings via dividends, buybacks and M&A activity — have not spilled over in any meaningful way to gold; neither directly through reallocation of investor funds due to price movements, nor indirectly due to concerns that all this liquidity would fuel inflationary pressures.

Sixth, the size of the demand response induced by the lower prices — from jewellery and other physical uses of gold — is too small to offset the erosion of investor interest.

Finally, there is the price level argument. Before its recent lacklustre performance, the price of gold had surged (for example, at one stage it had risen more than $1,000 per ounce from its November 2008 level of around $700). Thus, it is the earlier price move that could be deemed unusual and excessive.

Assessing the cyclical versus secular/structural balance of these seven factors, it is hard not to conclude that gold may well be experiencing an erosion in its positioning as a core holding in diversified institutional and retail investment portfolios. The more this happens, the more enticing it will be for “fast money” to short the metal as a way of inducing even greater sales by disappointed core holders.

This situation is unlikely to change soon but it need not be terminal. A shift would probably require a broader normalisation of financial markets, including a diminution in the direct and indirect role of central banks in determining asset prices and their correlations. Until that happens, the glittering metal is likely to continue to languish.

No wonder many Investors are shifting towards Art in major ways.

Flat footed antelopes are always lagging behind but when they see the light they all take flight.

This has been the recent experience of the Art World where people receive surprising new value in seeing demand outstrip supply for the first time in twenty years.

But moving to Art has been a boon to every civilized Collector out there.

Gold is Crass.

Art is Great.

Gold is plebeian.

Art is Aristocratic.

Gold is yellow.

Art is the full palette of colours. It’s a veritable Rainbow of Light and Colour and it’s also pleasant to behold.

Gold is cold.

Art is warm.

Gold is alien.

Art is friendly and is something to cherish too.

Gold is always hidden.

Art in always in the open, to be enjoyed…

Recent Art Auction records have been forthcoming and show us great promise for the general valuations of Good Art.

Slow things are well — slow but fast and furious Good Art is well — Great.



Take your pick…

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