Commodities | Jan 14 2008
By Chris Shaw
According to BMO Financial Group global portfolio strategist Donald Coxe the explanation behind gold’s run in recent months is relatively simple, as with the financial crisis resulting in substantial write-downs and write-offs investors have turned to gold as it is an asset that cannot be written down.
At the same time the commodity retains its position as a store of value and the only one that is not someone else’s liability. In other words, there is not the fear with gold of investing in an asset such a Bank of America’s foray onto the Countrywide share registry only for the value of that asset to quickly fall.
Citigroup is another example as Coxe notes the bank is likely to write down as much as US$22 billion in assets this year, while more is definitely possible. These question marks over the health of banking sector balance sheets implies a bear market is in place, the positive being Coxe doesn’t expect it will be too deep a bear market as a fundamental decoupling is taking place.
This decoupling means global growth will remain solid thanks to the impact of China and India on the world economy, which will be enough to counter the current weakness in the US. For any reversal to a new bull market it will require financial stocks to bottom and then outperform in relative terms and this seems some time away in Coxe’s view.
In terms of gold Coxe suggests the increase in the value of reserves in the ground would suggest shares of gold companies should outperform the bullion price, but the fly in the ointment here is the location of many of the new, major gold projects.
As he notes a lot are in South America and here there is less reliability in government actions, as it remains a possibility laws can be changed to repatriate some reserves or operations “for the good of the peopleâ€, which adds to the risk in buying gold stocks directly rather than bullion.