Did the Gold Bull Run End in 2012?

24th December 2012

The soaring price of gold started to ease over the course of 2012, leading some to question if the decade-long bull market for the yellow metal had drawn to a close.

Gold prices have seen an upward trend since the start of the decade and rose significantly as the financial crisis began to spread in 2007. Thanks to the metal’s safe haven status and demand for jewelry, gold has risen by close to 300% over the past ten years.

But gold has started to come down from recent highs. Signs of progress on the US fiscal cliff and the fading into the background of the eurozone crisis have bolstered investors’ confidence and pushed them from the safety of gold towards riskier assets such as equities.

Given that gold produces no income, it could be argued that it has been in a bubble since time immemorial and overdue a correction. On the other hand, I think there are a number of factors to suggest that the bull market for gold is set to continue for at least another year.

Calling the end of gold bull run

As of 19 December, the gold spot price was around $1,673/oz. This was a slight improvement over recent days when it dropped to a three-and-a-half month low, but below the record nominal high of $1,920 seen in September 2011.

Investor sentiment towards gold has shifted in recent years. The view that the precious metal was primarily a safe haven/inflation hedge appeared to falter as the price rose and concerns mounted that gold was in a bubble, with investors now regarding it as just another risky asset, after all – it is a commodity, and we all know that commodities are risky.

Julian Jessop, head of commodities research at Capital Economics, said: “Since gold is both expensive relative to its own history and provides no income, it is understandable that gold might now look less attractive to investors.”

Furthermore, important macroeconomic factors strengthen a negative outlook for gold price. In particular, a sustained recovery in the US economy could prove worrying for gold bulls as this could increase the likelihood of interest rate rises while making income-paying assets more attractive.

Goldman Sachs and BNP Paribas are among those calling the end of the gold bull market, having recently trimmed their 2013 forecasts to $1,800/oz and $1,865/oz respectively.

Gold supports in place

But despite these concerns, there are a number of reasons to expect gold to perform strongly in 2013 and improve from the relatively weak growth seen over the past year.

The outlooks for the eurozone and Japan are still on the weak side, despite recent signs of improvement. Europe’s financial crisis could flare up again next year if a lasting solution is not found while the fiscal position of Japan is attracting investors’ concerns.

Other issues that could allow gold to hold onto its safe-haven status include continued tensions in the Middle East and extended uncertainty about the US debt ceiling.

Meanwhile, monetary policy appears to be supportive of higher gold prices next year. So long as interest rates remain low and stimulus does not prove so effective it causes markets to anticipate its withdrawal, continued large-scale asset purchases by the major central banks will expand the monetary base and lift inflation expectations, aiding gold.

And while an improving outlook for the US economy would be negative for gold prices, a similar move in emerging markets would be beneficial for the metal. Rising incomes in such nations mean more people are able to afford to buy jewelry, offering a separate source of demand from investors and central banks.

Expecting gold to glitter

Factors such as the above have prompted Capital Economics and other market commentators to offer positive forecasts for gold prices next year.

Capital Economics said gold will reach a peak of $2,200/oz during the second half of 2013, up from its previous estimate of $2,000/oz. Bank of America Merrill Lynch has set a $2,000/oz target on the metal while Deutsche Bank recently raised its gold forecast to $2,113/oz for next year.

Gold has set itself apart from other commodities even though it has few practical uses and no income. Indeed, it can be regarded as another currency alongside the dollar, sterling, the yen and the rest.

We move into 2013 with an improved outlook on many fronts – the US economy, the eurozone crisis, Chinese growth. However, significant risks remain and are well flagged to investors. Because of this, it seems unlikely that 2013 will be year gold loses its shine.

UK Government rumoured to be considering their own FATCA legislation

8th December 2012

Britain’s overseas territories, including the Crown Dependencies (Jersey, Guernsey & Isle of Man), Gibraltar and the Cayman Islands, are expected to be seeking official confirmation with some urgency of a report that the UK government is planning a ‘son of FATCA’ aimed at obtaining information on all accounts held by British taxpayers.

News of the plans emerged in a report last Friday in International Tax Review (ITR), which said it had seen a copy of a leaked draft of a government document detailing how the scheme would work.

The ITR report referred to the plan as a ‘son of FATCA’ scheme, after the US Foreign Account Tax Compliance Act which demands information of foreign financial institutions on its taxpayers.

“The draft agreement…will require the automatic exchange of information for each reportable account of each reporting financial institution. That would include full details of all beneficial owners of the account, including those whose identities might otherwise be hidden by trusts or companies.

“It will also require the account number, name and identifying number of the reporting financial institution as provided when registering with the IRS for FATCA purposes, and the account balance or value as of the end of the relevant calendar year or other appropriate reporting period or, if the account was closed during such year, immediately before closure.

“The move will deal an almost-fatal blow to tax evasion through the UK’s tax havens”, the ITR report went on, adding that it is “a coup for the Tax Justice Network, which has long been arguing for automatic information exchange”.

Publicly, Government ‘rejected’ need for ‘UK FATCA’

The document seen by ITR appeared to contradict a statement by the Government a couple of weeks back, in which it “publicly rejected the need for a UK version of FATCA” in a response to an International Development Committee report, the ITR noted.

But “in private…the Government has already drafted [this] legislation, which it will impose on its Crown Dependencies and Overseas Territories…[including] Cayman Islands, the Channel Islands and the Isle of Man.”

The ITR said it expected an “autumn” (2013) announcement from the Government, “with the legislation coming into effect on January 1, 2014”.

Little surprise in some quarters

The news will not come as a surprise to some observers, who have seen a global move towards greater willingness on the part of governments – particularly in the wake of the global financial crisis – to cooperate in an effort to boost their tax take from the large number of individuals many governments believe are hiding significant amounts of wealth offshore.

Some 14 months ago, Debbie Payne, a director of tax at PwC in London and an expert on FATCA, told an audience of private equity industry officials that there was “a distinct possibility” that certain European countries would decide to “break away” from the rest of the pack “and bring in their own domestic, FATCA-like regimes”.

She observed that the Americans were surprised at the negative response much of the rest of the world had shown to FATCA, since, she noted, the genesis for the plan had come out of meetings held by the G7 and G8 countries following the financial crisis, and subsequent discussions.

“They’re saying, ‘you were sitting in the same meetings as we were with the OECD, and you didn’t say [at that time that] you couldn’t or didn’t want to comply with this; so why are you getting so concerned when all we are doing is going first?’”

HMRC sending out warning letters to participants in an avoidance scheme

3rd December 2012

HM Revenue & Customs is sending letters directly to 1,500 people who it believes have signed up to one particular avoidance scheme.

The correspondence is believed to be the first of its kind and appears to be a pre-emptive strike strategy before the scheme’s legality is challenged, according to the report on BBC’s website.

The National Audit Office said in a report issued last week that HMRC was dealing with a backlog of 41,000 cases of aggressive tax avoidance involving individuals and small companies.

HMRC is sending out four versions of the same letter in a pilot scheme, one of which states: “You are in the small minority of people who have made the deliberate choice to avoid tax. We focus our resources on this small minority. The choice that you have made changes the way we view your tax affairs.

“Our specialist investigations unit will be carrying out a full investigation into this scheme and they will open an enquiry into your tax affairs.”

Another extract from the letters stated: “We are committed to challenging aggressive tax avoidance, and we will do so through the courts where appropriate. If we do this then it will lead to years of uncertainty about your tax affairs, and mean considerable additional cost to you. We are already challenging similar schemes and we have a very successful track record in the courts with schemes of this type.

Your decision to use a scheme such as this means that we will treat you as a higher risk customer. Therefore we will monitor more closely your tax affairs.”