Gold – the strategic asset in times of crisis
This week the firm EUR currency has disappointed investors and has been a factor in raising the gold price. The agricultural commodities are a prime reason for the price of gold to fall recently. There is a tendency for gold prices to respond positively to inflation concerns and negatively if concerns ease. The gold demand in India may have an opportunity to increase when the rainfall levels improve. This in turn will have an affirmative effect on the drought-like conditions earlier in the planting season. In addition, gold prices tend to move higher as the food prices filter through to the end-customer.
Sir Mervin King, BoE governor, revealed in the latest quarterly inflation report a need for quantitative easing to help boosting the UK’s weak economy. As the precious metal market benefited from a bull run until September 2011 and attracted shareholders to invest in gold for their piece of mind, now the returns from funds that invested in gold-mining companies are falling. After the Euro crisis took advantage of the markets, the shares in gold-mining companies have fallen further than the gold price.
“At times of extreme market stress, gold is seen as a safe haven and has proved the place to be for investors – but it is not without risk.” – stated the managing director at Chelsea Financial Services Darius McDermott. This is proved by the massive price movements from last year: from £1,400 per ounce to £1,900 per ounce until the final price at the end of the year stopped at £1,565 per ounce.
Not until recently, the high correlation between the performance of gold and gold shares seems to be distorted. Prime reasons are the uncertainties within the global economy and a “failure to hit production targets” –Tom Becket, chief investment officer at Psigma Investment Management, says.
During the last decade, returns on equities have been low with exception of the silver, wine, art and gold, also called as “swag” assets, which have performed quite well. Unlike the paper money, swag assets are finite in supply. If governments’ intention is to strive for a bail out with the help of printing more money, subsequently the beneficiary in this case would be the swag assets. Therefore, the swag assets, just like the properties that people hold, have to be viewed as a very long-term prevaricate against money printing and inflation. And if an account is taken on the upcoming financial repression, a wise choice for shareholders who invest in gold is to keep 10-20 % of their total assets in SWAG.
The fast pace of the changes happening in the Fed concerned with the quantitative easing, the Bank of England connected with the expansion of the bond-buying programme in July and the probable reducing of the cost of Spain and Italy from the ECB are all reasons for uncertainty in the monetary system and may lead to further inflation.
The warning of Gavin Haynes, an investment director at Whitechurch Securities, should be taken into consideration: “Demand has been primary driven by investor flows, specifically from western institutional investors looking to diversify their exposure to other assets and protect against market shocks. Whether such flows are sustainable is questionable….”
The demand for gold reached 990 tonnes in Q2, which is 7% lower than last year. On the other hand, the European purchase of bullion bars and coins rose 15%, revealing investors’ demand for gold for capital preservation in light of the European debt and banking crises. Shareholders show their interest in investing in gold and still gold is the preferred and consistent portfolio diversifier.
2012-08-17 13:02:24
Source: http://blog.kkbullion.com/2012/08/17/gold-the-strategic-asset-in-times-of-crisis/
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