by Garry White
If there is one thing that gold loves, it's a crisis - and once again the commodity has started to outperform.
"Gold is likely to move to record highs if trouble continues," said Adrian Ash, head of research at Bullion Vault, which holds more than $1bn (£621m) of gold for clients.
At $1,405, the price is already closing in on its all-time high of $1,423.75, hit on December 6 last year.
"Gold is a form of crisis insurance, one that just keeps paying," Mr Ash said. "If you bought when Northern Rock started to crumble you would have doubled your money by now. It has kept paying out as crisis insurance for the past four years."
Indeed, the last big gold spike shares some similarities with the situation in which the world finds itself now.
"There are interesting historical comparisons with 1980 when tanks were going into Afghanistan and there was weak leadership in the US," said Mr Ash.
"Back then we also saw soaring oil prices and runaway inflation, making events today sound very similar to the last time gold really outperformed.
But there is still scope for outperformance, as the inflation-adjusted price is still way off its highs 30 years ago. It hit $850 an ounce in January 1980, which is something in the order of $2,250 when adjusted for inflation. If the 1980s really are back, gold has much further to run.
Capital Economics, led by economist and Sunday Telegraph columnist Roger Bootle, predicted in December that gold could hit $1,600 in 2011 and reach $2,000 by the end of 2012.
"We are increasingly positive on gold. A firmer dollar, fading inflation fears and greater risk appetite may limit upside in the next few months. But the price of gold should continue to be supported by demand for a safe haven from other potential economic and financial shocks," Capital Economics said.
However, it is political turmoil driving the price higher at the moment gold is a very political metal. "Buying gold is always a political investment because you are essentially opting out of the world's monetary system," Mr Ash said.
With continued money printing via quantitative easing in the US, many are losing faith with global currencies. It's not just investors who are spooked by rampant money printing by the US Fed or savers concerned by inflation who are turning to gold. Central bankers are, too.
Earlier this month the World Gold Council revealed that central banks had become net buyers of the metal in 2010 for the first time since 1988. Until 2009, central banks had been unloading their gold reserves, believing it could go no higher, but things have changed.
Historically, Western governments had been holders of gold, but now central bankers in emerging markets are increasingly buying into the gold story.
"Emerging nations that have not historically backed their currencies by gold and therefore have not acquired enormous holdings of the metal are redressing the situation," said Daniel Major, a metals analyst at RBS (LSE: RBS.L - news) . "The trend is characterised in Russia (OMXR.EX - news) , where purchases are scheduled to continue at 100 tonnes per annum, having purchased 135 tonnes last year."
China has started buying because its massive holdings of dollar-denominated debt have given the country substantial currency risk in its reserves. Latest figures from the US Treasury show that China held almost $892bn of US bonds.
"China's gold reserves of 1,054 tonnes at end 2010 accounted for just 1.7pc of total forex reserves," Mr Major said. It would be surprising if the Chinese did not wish to diversify their reserves further.
There are many ways to play the gold price from holding the physical metal to exchange traded funds to equities. The price is likely to remain volatile but high, so equities are a good way to play the commodity. You should invest in gold companies that have production but also the potential to increase their output or reserves.
Every time you switch on the TV you can find another reason to buy gold. It appears that crises just won't go away.
No comments:
Post a Comment