When the S&P 500 hit an new 2010 high on April 23, many investors were optimistic that the debt scare in Europe would turn out to be only a minor speed bump on the relatively smooth road to recovery. But over the last four weeks risk aversion has soared, as a “flash crash” shook investor confidence and increasingly dismal forecasts for Europe sparked broad sell-offs (see Ten Shocking ETF Charts From The Flash Crash). The eye of the storm responsible for the financial destruction may be centered over Athens, but fear has once again rippled throughout the global economy.
As the chaos of the last month moved major markets into “correction” territory, investors have once again flocked towards safe havens. The U.S. dollar has surged on a wave of buying from risk-averse investors, hammering commodity prices and exacerbating the downturn for resource-rich economies. And gold, a well-tested asset class during turbulent economic stretches, has seen its ten-year run higher extended further. Despite pulling back slightly in recent sessions, the SPDR Gold Trust (GLD) is up more than 7% on the year, thriving on a surge in volatility and sudden aversion to equities (see Three Leveraged ETFs Up 50% During The Correction).
The popularity of gold as a portfolio holding is evidenced by the size of ETFs offering exposure to the precious metal. GLD now has more than $40 billion in assets, and saw cash inflows of more than $1 billion in April. The iShares COMEX Gold Trust (IAU) has assets of about $3 billion, while the ETFS Physical Gold Shares (SGOL) has accumulated more than $400 since its launch less than a year ago (see a breakdown of these products and others in the Guide To Gold ETFs).
Determining the fair value of gold is an inherently difficult task; the metal pays no dividends or coupons, forcing investors to analyze less quantitative factors in their valuation. But these challenges haven’t caused a shortage of opinions on the outlook for gold. Just as investors are divided on the short-term outlook for equity markets, there are wildly different predictions for the path of gold bullion prices during the remainder of 2010. Some legendary investors see gold as one of the only trustworthy assets in coming months, while others believe that a growing gap between the current price level and the metal’s fundamentals points to a major downward correction.
Gold Bull Betting Big
Thomas Kaplan generally keeps a lower profile than other billion investors, but the commodity magnate’s bullish bet on gold prices has made him a person of significant interest in recent weeks. While many hedge fund managers and high net worth individuals have made minor allocations to gold, Kaplan has wagered the bulk of his significant portion on precious metals.
“I’ve reached a point where I feel the only asset I have confidence in is gold,” said Kaplan in an interview with the Wall Street Journal. Kaplan isn’t disclosing how much physical gold he owns through Tigris Financial Group, but he has amassed significant holdings in gold mining companies, including several early stage companies known as “junior miners” (see more on the Junior Gold Miners ETF). In addition to bullion, Kaplan owns stakes in 17 companies on five continents, reportedly bringing his investment in gold to $2 billion. “You’ve got a perfect storm with no apparent solution,” Kaplan told the Journal. “If the world does well, gold will be fine. If the world doesn’t do well, gold will also do fine…but a lot of other things could collapse.”
Time For A Reality Check?
Not everyone shares Kaplan’s bullish outlook on gold prices. In a recent interview with Hard Assets Investor, Jon Nadler, metals market analyst for Kitco Metals, warned that gold prices may see a downward correction in coming months. Noting that fears over the long-term ramifications of the euro zone’s current struggles may be a bit overblown, Nadler makes a case for a retreat in bullion prices. “Gold will eventually return to more ‘realistic’ price levels; ones that satisfy jewelers, producers and even individual investors in terms of its presence and purpose in a portfolio,” he says. “We’re really looking for an eventual evaporation of the fear and greed premium that’s permeating the market at this moment, and has been present therein since last fall, but one which has risen given what’s happened over the past few weeks.”
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Disclosure: No positions at time of writing.