HardAssetsInvestor

Written by Drew Voros  |

May 23, 2012

ETFS' Brooks: Gold’s Sell-off Opens Buying Window On Way To 12th-Straight Bull Year

Details

Head of research for ETF Securities says the yellow metal’s recent movements are driven by technical factors and the need to raise cash as stocks fall, but an uptrend is on the horizon.

Nicholas Brooks, who has more than 15 years of experience as a global economist and strategist, is head of research and investment strategy for ETF Securities, the U.K.-based provider of more than 200 exchange-traded products in equities, currencies and commodities. With volatility in gold grabbing headlines with its recent sell-off and more recent recovery, HAI Managing Editor Drew Voros caught up with Brooks to discuss why gold is seemingly losing its safe-haven status and appeal during times of uncertainty. Brooks also discussed China’s growing prominence in the gold market and whether the yellow metal will finish 2012 in the black for the 12^th-straight year.

Hard Assets Investor: We’ve been seeing a sell-off in gold for the last week or two and now we are seeing a bounce back. Is this more of a technical reaction for gold?

Nick Brooks: The reason we saw the gold price bounce was a combination of macro and technical factors. From a macro perspective, the weakness of some of the data coming out of the U.S. and Europe last week — along with some of the comments coming from some of the members of the Fed, as well as the ECB and as the Bank of England — are indicating that further monetary easing is more likely than investors were factoring in just a few weeks ago.

Clearly, any sign that there’ll be a QE3 or more aggressive easing by the Fed, ECB or by Bank of England certainly is bullish gold. The main driver of the gold price on a medium- to longer-term basis is gold as an alternative to fiat currency. Investors who are concerned about the decline in the real purchasing value of the world’s major reserve currencies are looking at gold as a hedge and looking at it as an alternative store value.

Then, technically, net-speculative futures positions were down to a level not seen since December 2008. Normally, traders will focus on things like that, recognizing that there's a little more upside than downside in the near term. Short-term traders were going to take advantage of that.

HAI: What can investors learn from gold’s sell-off?

Brooks: Investors have been moving to the sidelines, raising cash and buying G-3 [U.S., Japan and German] bonds. When they do that, they sell pretty much everything else. And that includes gold. We’ve seen that multiple times over the past 10 years. The most recent big episode, of course, was 2008, when the gold price dropped nearly 40 percent. There was massive deleveraging and a rush into cash and, you know, a rush to liquidate anything that was liquid. And gold tends to be very liquid.

But even during less-severe risk-aversion moments or events, we’ve seen this because gold is generally held in most investors’ portfolios, as part of the so-called risky asset pool. It’s that issue that causes a lot of confusion to investors who are new to gold, because they hear gold is a safe haven. Gold is where you go when the world is falling apart. And then, when the world falls apart, the gold price drops 40 percent. What’s going on here? Something is wrong.