Gold- benefiting from investor uncertainty?
Gold prices are now at historically high levels with gold approaching the psychologically significant barrier of $1000 per oz.
Gold did breach the $1000 barrier last March 2008 but fell back as fears of inflation receded. Now many analysts are predicting it will reach $1000 per oz again due to continuing investor uncertainty regarding the equities market and low interest rates making many other forms of investment unattractive.
Simply put Gold is considered a “safe haven” by investors and as a hedge against inflation ie. protecting existing wealth. But why should inflation be a problem when the economy is in the doldrums? The explanation lies in the banking crisis and consequent US government response- the banking bailout. During this bailout the US Federal Reserve has announced it will purchase a total of $1.75 trillion of mortgage related debt. Such sums can only be created by printing money or its technical term “quantitative easing”. Printing money in such volumes is seen as a way of creating inflation by no less an authority than the current head of the US Federal Reserve, Ben Bernanke, who declared back in 2002:
“under a paper money system, a determined government can always generate higher spending and hence positive inflation”
Thus it is likely that a period of high inflation will follow once the economy starts to grow again and it is in anticipation of this possibility that the price of Gold has been rising over the last few months. But does it have further to go?
We have been finding out some interesting news about Gold recently that you may not have heard about in the newspapers:
- a report by the The Economist has said that Gold production in the world economy actually fell last year by 4% as some fledgling small scale mining firms faced closure because of scare credit caused by the credit crunch.
- hedge fund Paulson and Co has paid $1.28 billion for a 11.3% stake in AngloGold Ashanti, a South African Gold mining company. John Paulson (no relation to Hank!) recently made $4 billion betting against the sub-prime mortgage sector so his enthusiasm for Gold is of significance.
We hesitate to call this a “Gold Rush” as there will always be short term market volatility as the daily news is digested by market traders etc. But long term trends seem to be pointing one way- some analysts are predicting a price of $1500 per oz is possible over the period of the downturn.
Gold clearly has a part to play in a diversified investor portfolio. HBS Financial Services Ltd offers a variety of services in relation to Gold from the acquisition of investment bars and coinage through to specialist advice on gold mining shares.