Sunday 4 December 2016

Gold rally expected to continue after giving best returns over past five years

Debarati Roy

Published 26/01/2012 | 05:00

GOLD provided the best returns of all commodities in the past five years when adjusted for volatility and Goldman Sachs says the rally will continue as options traders signal no change in the metal's relatively low risk.

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Analysis shows the Standard & Poor's GSCI Gold Total Return Index produced a 6.5pc risk-adjusted return in the last five years, the highest among 24 commodities tracked by S&P, data compiled by Bloomberg show.

Silver, the next-best performer, yielded a risk-adjusted gain of 3.1pc, while a total-return index for all raw materials slipped 0.2pc.

Bullion, which has seen 11 years of gains as investors sought a haven amid two bear markets in stocks and a sovereign debt crisis, also posted the safest return in the past 12 months despite falling from a record high to a five-month low in the second half of last year.

Goldman Sachs forecasts gold will reach a record this year, and a gauge of future price swings is near a five-month low.

"Economic problems incr- eased globally, and gold emerged as a safe-haven investment," said Walter Hellwig, who helps manage $17bn (€13bn) of assets at BB&T Wealth Management in the US.

"Monetary easing by China and quantitative easing in Europe and the US will help it remain a store of value."

The risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of income per unit of risk. The returns are not annualised.

A higher volatility means the price of an asset can swing dramatically in a short period of time, increasing the potential for unexpected losses compared with a security whose price moves at a steady rate.

Gold's longest rally since the 1920s in London has attracted investors worldwide seeking protection from some of the most violent market swings in stock markets on record.

The Dow posted four consecutive days of 400-point swings last year, the longest streak since data began in 1896. The S&P 500's average daily price move since its 2011 high in April was 1.8pc, compared with an average of 1.1pc in the five years before Lehman Brothers collapsed in September 2008.

The risks that spurred market volatility last year will keep swaying asset prices and the global economy, Nouriel Roubini, the economist who predicted the 2008 financial crisis, said earlier this month.

Rising commodity prices, uncertainty in the Middle East, the spreading European debt crisis, increased frequency of "extreme weather events" and US fiscal issues are "persistent" problems, he said.

That's good news for havens such as gold. Goldman Sachs said earlier this month that futures will advance to $1,940 an ounce in 12 months. Morgan Stanley forecasts the metal will climb to a record average $2,175 in 2013, analysts said. Futures in New York were at $1,661 an ounce yesterday.

"Gold has become a mainstream alternative investment, so rather than a store of value, it's become a reflection of flows," said Michael Shaoul, chairman of New York-based Marketfield Asset Management, which manages $1.3bn. "It is not immune to volatility." (Bloomberg)

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