Gold provided the best returns of all commodities in the past five years when adjusted for volatility, and Goldman Sachs Group Inc. says the rally will continue as options traders signal no change in the metal’s relatively low risk.
The BLOOMBERG RISKLESS RETURN RANKING shows the Standard & Poor’s GSCI Gold Total Return Index produced a 6.5 percent risk-adjusted return in the five years ended yesterday, 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 3.1 percent, while a total-return index for all raw materials slipped 0.2 percent.
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, even as it fell from a record high to a five-month low in the second half of last year and gold investors led by John Paulson suffered losses. 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 increased globally, and gold emerged as a safe-haven investment,” Walter ‘Bucky’ Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. “Monetary easing by China and quantitative easing in Europe and the U.S. 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 annualized.
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 at least 1920 in London has attracted investors worldwide seeking protection from some of the most violent market swings in stock markets on record. The Dow Jones Industrial Average 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 1.8 percentage points, compared with an average of 1.1 percentage points in the five years before Lehman Brothers Holdings Inc. 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 in a talk at Bloomberg’s headquarters in New York on Jan. 19. Rising commodity prices, uncertainty in the Middle East, the spreading European debt crisis, increased frequency of “extreme weather events” and U.S. fiscal issues are “persistent” problems, he said.
That’s good news for havens such as gold. Goldman Sachs said in a Jan. 13 report 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 Peter Richardson and Joel Crane said in a Jan. 17 report.
Futures for February delivery jumped 2.1 percent to settle at $1,700.10 today on the Comex in New York. That’s the highest closing price since Dec. 9.
Traders anticipate that gold will gain at a steadier pace again, after last year’s correction. The metal’s three-month implied volatility, a gauge for future price swings, touched 19.04 yesterday, the lowest since early August. The most widely held options contracts give holders the right buy at $2,000 by June, data from the Comex exchange show. The ratio of puts per call for the SPDR Gold Trust, the biggest bullion ETF, is near the lowest since October 2008.
“People are still very under-invested in gold, and so there is a huge scope of that increasing,” said Jochen Hitzfeld, the analyst at UniCredit SpA in Munich who was the most accurate precious-metals forecaster tracked by Bloomberg in the past two years.
Gold returned 1.1 percent in the 12 months through Jan. 24 when adjusted for price swings, compared with a 0.8 percent gain in unleaded gasoline, the second-best performer. Stocks, as measured by the S&P 500, returned 0.2 percent over 12 months risk-adjusted and 0.1 percent over five years.
Gold hasn’t been shielded completely from market swings after investors accumulated more than 2,355 metric tons in exchange-traded funds backed by bullion, an amount valued at more than $126 billion, data compiled by Bloomberg show. Holdings have more than doubled in the past four years and climbed to an all-time high of 2,393 tons on Dec. 13.
Futures, which rose to a record of $1,923.70 in September on the Comex, slumped 11 percent the same month and retreated to a five-month low of $1,523.90 on Dec. 29 as investors sold the metal to cover losses in other markets. The risk-adjusted return in the fourth quarter was minus 0.1 percent, while crude oil, the best performer in the three months ended Dec. 31, returned 0.8 percent.
“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 $1.3 billion. “It is not immune to volatility.”
Paulson, the hedge-fund manager who suffered the worst year of his career in 2011, lost 20 percent last month in his gold fund, which can buy derivatives and other gold-related securities, according to an investor update, a copy of which was obtained by Bloomberg News.
Most investors are sticking with the metal. David Einhorn’s Greenlight Capital Inc. said in a Jan. 17 letter to investors that the fund continues to hold gold and gold-mining equities because of concern that global fiscal and monetary policies “tempt fate.”
George Soros, 81, the billionaire founder of Soros Fund Management LLC, increased his stake in SPDR Gold Trust, an exchange-traded fund tracking the metal, to 48,350 shares as of Sept. 30 from 42,800 and added options, according to Securities and Exchange Commission filings. Soros, who called gold the “ultimate asset bubble” in 2010, reinvested in gold shares after selling 99 percent of his holding in the first quarter of last year.
Since the start of this year, gold has been among the top five commodities after adjusting for volatility, while zinc was the best.
Central banks around the world added 157 tons to their holdings in the six months through November, World Gold Council data show.
China overtook India in the third quarter as the largest gold-jewelry market, according to the World Gold Council. The country’s consumption will continue to grow this year, according to Albert Cheng, the Far East managing director at the council. Mainland China imported a record 102.8 metric tons in November from Hong Kong, trade data on Jan. 11 showed.
“Everybody is conditioned to think of returns in a winner fashion,” said Stanley Crouch, who helps oversee $2 billion as chief investment officer at New York-based Aegis Capital Corp. “During times of crisis, volatility really spooks people, especially if it is in gold, as people look at it as a store of value. However, I believe we have put in a bottom for gold so we will see gold continue to climb.”