For a safe haven, there's not much that's as good as gold these days
SHARESCOPE has always had reservations about gold. There seems to be something incredibly childish about hoarding a substance that has few practical uses and whose price depends on how many Chinese girls decide to buy bracelets.
Still, Sharescope did not believe it was possible for the things to get quite as messy in the West as they are today or for gold to outperform almost every other asset class over the past decade.
For all sorts of reasons, gold is now a good hedge against calamity and deserves a place in most portfolios.
A common misconception about gold is that it only performs well when things are going badly but the data show the precious metal can also advance at other times. Gold rose 5.8pc in 2008 as US consumer prices gained 0.1pc. The metal added 18pc in 2005 when the US Dollar Index, a measure against six counterparts, advanced 13pc and gold rose 8pc this year as the US Dollar Index jumped 11pc.
This week, at a very difficult point in the financial crisis, gold prices have fallen about 5pc recently from a record $1,249.40 an ounce on May 14, but the median in a recent Bloomberg survey of 23 traders, analysts and investors suggests it will reach $1,500 by the end of the year.
The main reason for this is that speculators are buying gold faster than the world's biggest producers can mine it and there are no signs this will change anytime soon.
Since the last week of April, exchange-traded products (ETPs) backed by bullion have been adding bullion at a pace not seen since the first quarter of 2009, in the wake of the collapse of Lehman Brothers.
Buying rose as European policymakers agreed on the €750bn emergency loan package which includes provisions to effectively print money.
In the week to May 14, (ETPs) backed by bullion added 41.7 metric tonnes, the most in 14 months, according to data from UBS.
China, Australia and the 15 other largest mining nations averaged weekly output of 41.6 tons last year so demand looks likely to continue for some time.
Gold is still at half the peak set in 1980, after adjusting for inflation. Then, prices rose to $850, equal to $2,266 today, according to a calculator on the website of the Federal Reserve Bank of Minneapolis.
Much of the demand is coming from holders of ETPs, including George Soros and John Paulson, who accumulated a record 1,938 tons by last week, eclipsing all but four of the biggest central-bank holdings.
Those interested in following in the footsteps of Mr Soros, who made his fortune betting against the Bank of England, and Mr Paulson, who made his betting against synthetic collateralised debt obligations, should consider the SPDR Gold Trust, the biggest ETP backed by bullion.
While buying ETPs makes sense, one question that remains unanswered is what use will an ETP be in a real crisis? It is hard to know whether investors will be able to cash in the ETPs when there is blood on the streets. For this reason it seems sensible to hold at least some gold in the shape of coins or bullion. It would be a comforting thought in an emergency to know one could put €20,000 or €30,000 in one's pocket without anybody noticing.
For those who like the thought of coins, those issued by Vienna-based mint Muenze Oesterreich AG are among the best. The mint's Philharmonic is the best-selling gold coin in Europe and Japan and can be easily bought and traded.
- Thomas Molloy
Irish Independent
