Yellow metal set to regain its glitter in topsy-turvy market

A saleswoman shows a monkey-shaped gold ornament at the Beijing Caibai Store, a leading gold jewelry seller in the capital. The Chinese lunar calendar system has 12 animals representing various years, with 2016 being the Year of the Monkey.[Photo by Wang Zhuangfei/China Daily]

My infatuation with gold can be traced back to a long time ago.

The description of "yellow, glittering, precious gold", which I happened to read in William Shakespeare's Timon of Athens in my college years in the late 1980s, is engraved in my mind. "Thus much of this will make black white, foul fair, wrong right, base noble, old young, coward valiant" - these words have been powerful enough to influence my life as well as investment decisions, up till now.

I have tried to live by the adage that silence is golden. Not surprisingly, I have also invested in gold, although indirectly. For many years I have been using a paper-gold account offered by my bank, which allows me to trade in the yellow metal without the delivery of its physical form.

Yet my affinity with gold did not make me any richer. After making a small profit when the gold price was on the way to its peak in 2011 at $1,920 per ounce, I have been losing money ever since. The past quarter was the sixth in a row that saw gold prices decline, the longest period of downward spiral since 1984.

Now gold hovers at around $1,100, a level nearly 10 percent lower than a year before, or a 45 percent plunge from its highest point. That is a far cry from the prediction Bank of America Merrill Lynch made less than four years ago, that gold could soar to up to $5,000 over the longer term.

I doubt I will see that ever happen during my lifetime, given the long cycle of price changes for gold, which takes decades. I am more interested in when gold will halt its continuous slide into the abyss. Some analysts claim there could be a much further downside move in the gold price to $900-$1,000, citing more US interest rate hikes in the future as a major factor.

I don't buy that doomsday scenario, as I believe some basic market rules that govern cost and price, as well as supply and demand, still apply.

The average industry cost of gold production is $1,200 per ounce, according to the World Gold Council in 2014. Any price below that level means possible bankruptcies of mining companies, which will in turn limit gold supply, and thus buoy prices.

More important, gold is getting scarce. At the current production rate of about 3,000 metric tons per year, known global gold reserves are expected to be depleted in 20 years, according to the US Geological Survey in 2014.

On the flip side, demand for gold is increasing, from the jewelry, investment and high-tech sectors. According to the WGC, growth in demand for gold in China, the biggest producer and consumer - already in high double-digits - will continue to rise in the next five years.

For thousands of years, gold has served as a means to protect wealth. Its value lies in its intrinsic properties that have not changed. It is durable, and never loses its luster.

Common sense is all I need to assert that gold at current level is undervalued.

Over the past 35 years, the price of almost everything - from goods to services - has skyrocketed, thanks to the country's ever-expanding economic size and the monetary supply that fuels it.

As I can recall, the average price of public transport has surged by at least 10 times, a hair cut 30 times, and a bowl of beef noodles 40 times. We in general don't feel the pinch given that average incomes have risen even higher.

But look at gold - a meager 25 percent rise in value from the level seen in 1980. Even though its price then stood at an all time high of $850, given that money supply has ballooned - by hundreds of times in China and at least six times in the US - gold at the current level is really a bargain.

The gold price has yet to see the light at the end of tunnel. But a golden rule of the market is to "buy low".

If winter comes, can spring be far behind?