How should we think about gold?

This has to be one of the favorite questions of nearly every investor we encounter, and despite our lack of specialized knowledge and our relative focus on the emerging universe we very often get dragged off into speculative discussions on the nature of gold demand and what gold prices are "telling us".

With this in mind we felt it was high time to host a conference call on the topic, and last week we invited our true specialists, UBS global commodity research analyst Julien Garran and precious metals trading strategist Edel Tully, to give their views on the underlying nature of the market and their forecasts for pricing and volumes going forward.

Forget the fundamentals, for now

If we had to summarize the conclusions on gold in a single phrase - keeping in mind that this is a bit of an exaggeration, and one to which Julien and Edel might well take exception - we would say "forget about the fundamentals".

What do we mean? Well, one of the key messages from the discussion below is that more traditional supply and demand factors such as mine production and jewelry demand have clearly had only a very limited impact on price dynamics over the past half-decade. Instead, the biggest driver of demand has been investment-related purchases.

And when we talk about investment demand, there are two main drivers: inflation and risk. I.e., gold does well when buyers are worried about inflation prospects, debt monetization and the debasement of national currencies, and also does well in an environment of heightened volatility and fear about the global economy.

What do we expect going forward? For the time being we expect the "fear trade" to continue to support gold prices - and over the medium term, ongoing monetization of the developed sovereign debt overhang also suggests that gold will outperform. The likely transition of global central banks from net sellers to net buyers is also a significant positive factor. And again, this despite relatively flat mine supply and falling "underlying" jewelry and technical demand.

The following is the full transcript of the call.

David Fuller's view The bottom line as far as I am concerned is all the historical evidence that gold remains a more reliable store of wealth than anything else which you or I can easily own (there is only one original Mona Lisa and it is not for sale). Gold is hard money because it is pretty, in finite supply, all but indestructible and cannot be artificially manufactured.

The gold price will always fluctuate, sometimes in a seemingly perverse fashion. Consequently, I am disinclined to pontificate as to what will cause gold to move up or down on any given day. Suffice it to say that gold moves on sentiment and liquidity, just like most other assets. I find the price chart for gold to be a much more reliable guide than opinions, mine or anyone else's.

Recently, I have been cautious of gold due to seasonal factors and those two key day reversals at the highs in June. However I can also see a fair amount of previous support to cushion downside risk. On a longer-term basis, I see no evidence that the secular uptrend fuelled in no small part by fiat currency printing is ending.