Investors should take advantage of gold price fall – Fidelity’s Wickwire

Otmane El Rhazi from The Bullion Desk.

The recent gold price drop represents an excellent opportunity for long-term investors to add the yellow-metal to their diversified portfolios, Joe Wickwire, Fidelity Investments portfolio manager, said at the LBMA Precious Metals Conference here.

Gold futures for December delivery on the Comex division of the New York Mercantile Exchange have fallen to $1,160 per ounce, nearly $130 below their year’s February high. This downward trend has been attributed to dollar appreciation and a rotation into risker assets, such as equities, among other factors.

But Wickwire argues that, from an asset allocation standpoint, actual gold market fundamentals are not be linked to transitory US stock market volatility or whether or not the dollar moves up or down against the euro or the yen. Those items can be the basis for short-term trading strategies but not for long-term portfolio construction.

“I believe that now is a good time to take advantage of negative short-term trading sentiment,” Wickwire said.

And while there may be plenty of noise surrounding the market at the moment, the gold industry is still ultimately dependant on an ability to profitably pull metal out of the earth. And the reality is that roughly 30-40 percent of mine supply is not cash flow positive below $1,250.

“We have entered a period of consolidation. At this price, there has to be a supply response,” said Wickwire, who added that this could come in the form of company mergers, mine closures or delayed capital investments.

The environment in 2014, Wickwire added, is somewhat analogous to 2001-2008. That’s when mine supply dropped 10 percent against a background of negative real interest rates, currency debasement and rising geopolitical tensions. During those years, the gold price rose tripled from $300 to $900.

“Today is quite similar – there are negative real interest rates, while countries are using currency as a policy tool to support nominal growth at the expense of real growth. And on top of that, supply from the gold industry is starting to come down,” Wickwire said.

“And it’s important to remember that a little gold goes a long way. If you had 5-10 percent allocation in your portfolio from 2000 to 2010, you wouldn’t haven’t have suffered a lost decade,” he concluded.

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