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Gold: A commodity play or a safe haven?

London, March 2011

Reuters: Gold prices have cooled-off since their historical highs in late 2010; however, most of the key macroeconomic price drivers point to continued momentum for bullion.

• Continuing weakness in the dollar, low to negative real interest rates, and rising global inflation expectations are likely to help extend gold’s rally. Additionally, TED spreads (a key gauge of market fear) have fallen significantly from their 2008 peak, and are currently below their long-term trend line, suggesting that gold’s recent rally is increasingly driven by inflation worries.

• Although gold has been on a relentless bull run since the start of the last decade, its performance lags in comparison to other precious and nonprecious metals. Silver and copper, for example, have outperformed gold over the last decade, and may therefore offer better high-beta commodity exposure.

• For those seeking an exposure to ?pure? gold mining equities, our user-created Global Large Gold Miners Price Index may point to attractive opportunities over the longer term. The index has outperformed bullion over the last decade, as well as in the recent leg of the rally, proving the dominance of gold stocks over the underlying asset.

• Investors looking at the rapidly developing economies (RDE) space may want to consider adding Thomson Reuters BRIC Precious Metals & Minerals Index to their portfolio. The index has outperformed the Thomson Reuters Global Emerging Markets Precious Metals & Minerals Index and our user-created Global Large Miners Index since its base date (July 2006).

• Recent data from the Commitment of Traders (COT) report reveal that gold producers have been hedging faster than gold users, possibly suggesting a near-term neutral to bearish outlook for gold. However, money managers have added more long positions since early February, and their actions may be pointing to a bullish outlook.

BACKGROUND

Gold prices, after hitting historic highs in December 2010, witnessed some decline at the start of the year, with prices coming off by about 6%. However, the last few weeks have seen gold prices again edging higher, and they are currently just about 0.6% lower than their historic highs. With oil and other major commodities also continuing their ascent, what does that mean for gold?

A November 2010 Thomson Reuters Proprietary Research study pointed to strong momentum for gold over the medium term, identifying strong global liquidity and low interest rates as support for a continued rally. Since that report, gold prices have risen by about 4%. In this new study, we revisit the gold rush theme: a) examining and comparing the performance of gold mining stocks at a regional/country level, b) shedding light on gold’s key macroeconomic price drivers and its performance versus other metals, and c) gauging the short-term outlook based on the Commitment of Traders report.


Download the Report here:

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