Given all the global macroeconomic problems facing the world, it's no wonder why investors have embraced gold. After all, the precious metal is seen as a "port in a storm" and all the debt, austerity and slowing developed market growth can certainly be seen as an approaching hurricane.
Funds like the SPDR Gold Shares (ARCA:GLD), stocks of mining companies and even gold coins have crept into a variety of retail investors' portfolios. While the long-term outlook for higher sustained gold prices is certainly rosy, a few investment banks and researchers are now eluding that lower prices may be on the horizon. For investors, this cautious outlook is something to consider. (For related reading, see Does It Still Pay To Invest In Gold?)
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Ending Its Long Bull Run
For gold bugs, new research by metals consultancy GFMS is cause for concern. The Thompson Reuters-owned research group estimates that while gold may reach a record high above $2,000 an ounce by early 2013, the precious metal is nearing the end of a decade-long run. Since 2001, gold prices have surged more 600% as sovereign bond risk and rock-bottom interest rates have taken hold. However, the improving financial landscape and macroeconomic picture over the next few years will "take the wind out of gold investments sales."
Recent bullish employment, consumer confidence and lower inflationary pressures will ultimately be gold's undoing, according to the group. Also the strength in the U.S. dollar as the "best house in the bad neighborhood" will cause gold to see price declines throughout the year. In addition, several major gold-buying regions will see their purchases soften throughout the year.
India, which is the world's biggest bullion buyer, will see lower demand as its currency weakness has negated dollar gold's declines. While China and Turkey will help buoy gold jewelry demand, overall purchases will decline by around 3.1% in 2012. Overall, GFMS predicts that world investment in gold will decline by some 250 tonnes in the first half of 2012.
In the face of this dwindling demand, gold supply is still rising. Mine output is expected to rise by about 3.2% during the year. On top of this, with gold's higher prices, an array of mining firms has expanded CAPEX spending and exploration efforts. These new mines, once they come online, will ultimately add to the supply pressures. For the beginning half of 2012, GFMS forecasts that gold prices will average around $1,640 an ounce and that gold's fundamentals seem to call for lower prices in the future. (For additional reading, check out A Holistic Approach To Trading Gold.)
Playing the Cautious Spin
With gold funds like the PowerShares DB Gold (ARCA:DGL) making its way into so many portfolios nowadays, it may make sense for investors to err on the side of vigilance. Adding a hedge could be in order. The ProShares UltraShort Gold ETF (ARCA:GLL) is designed to deliver twice the daily inverse return of gold bullion prices. With more than $190 million in assets and with nearly a million shares trading hands daily, the fund is the most popular choice of investors looking for a hedge. Similarly, the PowerShares DB Gold Short ETN (ARCA:DGZ) can provide the same effects minus the leverage.
Perhaps the best ways to hedge one's exposure to gold is through the stocks of large dividend-paying gold miners. Many of these firms have costs of production near $500 an ounce. Even if gold prices were to stay near today's levels or drift downwards, many of the producers are still making a large profit.
The Market Vectors Gold Miners ETF (ARCA:GDX) is the largest fund in the sector, but the new iShares MSCI Global Gold Miners Fund (ARCA:RING) undercuts on fees. Both offer a way to gain wide access to the miners. Better still, both Goldcorp (NYSE:GG) and Newmont Mining (NYSE:NEM) offer high-growing dividends in the space and represent two of the premier miners.
The Bottom Line
With investor enthusiasm for gold still rising, GFMS's latest report can be seen as a wet blanket. The group estimates that the improving global macroeconomic picture will take some of the luster away from gold. For investors, that could mean it's time for a hedge. The previous ETFs along with the VelocityShares 3x Inverse Gold (ARCA:DGLD) could be exactly what a portfolio needs. (To learn more, read 8 Reasons To Own Gold.)
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article. Aaron Levitt is long gold through the iShares Gold Trust ETF (ARCA:IAU).