Gold, Gold, Gold. Investors unwavering conviction that when all else fails, bet gold. Investing in gold for the moment is logical because it provides a hedge against inflation, deflation and most importantly currency devaluation.
Statistics released by the World Gold Council support the notion of 'Gold is good' as the research confirms that emerging economics such as Mexico, Russia, China, India, Korea and Thailand have increased their holdings of gold, thus, reducing supply and helping to boost market sentiment.
Prior to the gold price spike of March 2008, investors would have earned a healthy profit over a three year period as the value of their investment doubled.
Gold as part of an investment portfolio will remain an effective inflationary hedge because it represents real value; as prices start to increase, the value of gold will appreciate. Gold is traded in U.S. dollars; a decline in U.S. dollars would result in an increased amount of U.S. dollars needed to purchase the same quantity of gold which leads to an increase in the value of gold.
Prominent investment managers', Shaun Price and Marc Lubazka of Touchstone Large Cap Growth Fund and Aurum Advisors respectively, are of the view that investing in gold will not only serve as a hedge against the current economic uncertainty but that gold will provide the long-term growth that has recently been lacking from investors' portfolios.
Commodity Ownership
Ownership of gold, similar to other commodities, comes in two forms - direct or indirect. Direct cash investment (ownership) is expensive and time consuming. Purchasing of the underlying commodity is a rare approach as it involves storage costs, insurance expenses and valuation expenses. In addition, no income is earned representing cash opportunity cost. Returns are only earned when the commodity is sold.
Indirect ownership involves investing in commodities through an investment vehicle (intermediary) or purchasing the stock or bonds of a commodity firm such as Rio Tinto. This approach allows access to commodities which would have been previously available due to capital requirements and expertise in managing the investments.
The Myth of 'the Safe Bet'
The concept of gold being a bubble is not farfetched. As the old adage goes "what goes up must come down".
Prior to the financial meltdown of August 2007, investors' had utmost confidence in real estate, specifically in residential real estate investments. The false sense of security was based on assumptions that house prices won't fall and the process used to rate whether a borrower was a credit risk was flawless. Furthermore, sophisticated financial products such as Mortgage Backed Securities (MBS's) and Collateral Default Obligations (CDOs) helped repackage these securities making it appear as a 'riskless' trade. Similarly, the characteristics of gold may lead investors to believe that in the current economic climate gold is a 'safe bet'.
Investors must be aware, gold should be held as part of a balanced portfolio for diversification benefits.
To Gold or not to Gold?
The U.S. government is set to continue with the quantitative easing approach which has yet to have the desired impact.
Consequently, discouraging bond and equity investors with characteristics such as high inflation, high volatility, and low liquidity look set to continue.
Further support of gold investment is that it strengthens the current aims of central banks which involve stimulating growth and diversifying their foreign exchange reserves, amid fears of currency debasement. Subsequently, boosting demand for gold.
Gold as part of a balance portfolio will provide the diversification and hedging needs that investors require during these uncertain economic times of inflation, inept fiscal and monetary policies exacerbated by Euro zone debt crisis.
In the near future; 'As good as gold' may prevail as the marquee statement among investors. Therefore, investing in gold for the moment is a "Safe Bet", if there is one.
About the Author
Yasin Ebrahim is a freelance journalist researching developments in the alternative investment field through exposure in traditional and social media. His background in risk and investment management coupled with leading industry qualifications; Financial Risk Manager (FRM), Chartered Alternative Investment Analyst (CAIA) provide him with a sound background to explore alternative investments.
© Capital ME 2012
