Asiaone - Gold Rush

Gold Rush

As gold price hits never-seen-before levels, Gabriel Chen looks at why the precious metal can make a good investment and asks analysts about its prospects.

Tue, Dec 15, 2009
The Straits Times

By Gabriel Chen

If some pundits are right, gold is well on its way to a dazzling US$2,000 (S$2,780) or more an ounce in the next decade - heights never even hinted at before this financial crisis struck.

The old record of US$1,030 set in March last year was surpassed in early October and prices have continued to climb.

To put that in perspective, gold was just US$254 an ounce back in 1999, a 20-year low.

'Gold is going up,' said Singapore-based investor Jim Rogers, who tips the precious metal to top US$2,000 an ounce in the next decade. 'I'm bullish on all commodities until the bull market comes to an end,' he told The Sunday Times.

Mr Rogers, who predicted the rally in commodities back in 1999, is not the only bull out there.

Goldman Sachs raised its 12-month gold forecast to US$1,350 an ounce this month from a previous estimate of US$960, while Barclays Capital has said that 'prospects for a run at US$1,500 should not be underestimated' next year.

Gold's glister has been fuelled by the persistent weakness in the American dollar and news that central banks in India, Russia and elsewhere have increased their holdings of the metal.

Speculation that governments, the biggest bullion holders, will make even more purchases is merely adding to the mood music.

Can the trend go further? According to Channel Islands-based GoldMoney.com founder James Turk, 'gold is going to be at US$8,000 by 2013' due to the historical relationship between the metal and the Dow Jones Industrial Average.

He was quoted by Bloomberg as saying that gold and the Dow were at around the same level during the Great Depression and the early 1980s.

In January 1980, they were both slightly below the US$1,000 mark, but while the Dow is up 10-fold since then, gold's ascent has not been as spectacular, he argued.

But others in the industry do not expect gold to soar that high.

'US$2,000 or US$3,000 an ounce levels make sense only if the US dollar drops by another 30 per cent on a broad basis and United States inflation moves to 10 per cent, which we do not expect,' said UBS Wealth Management's head of commodities research, Mr Dominic Schnider.

However, should Mr Turk be correct, it will not be long before we all start melting down our wedding rings.

Why invest in gold?

There are fears that the massive monetary and fiscal policy stimulus plans that have been pumped into the global economy will generate inflation.

Gold acts as a hedge against such an eventuality.

Dr Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors, said gold is seen as a good alternative to paper money.

'While there are fears about the future of the US dollar, the outlook for other major currencies is not much better,' he said.

'Europe's economy looks worse than the US, the strong yen looks unsustainable given the damage it has already caused the Japanese economy and the (Chinese yuan) is not really an option as it's not convertible.'

A convertible currency is one that can be quickly and easily bought and sold for other currencies.

Diversification advantage

Many studies show that gold prices generally move in the opposite direction from stock prices: Gold soars when stocks tank.

'Portfolios that contain even a small allocation of gold are proven to be generally more robust and better able to cope with market uncertainties than those that do not, showing improved stability and predictability of returns,' said Mr Albert Cheng, managing director of World Gold Council for the Far East region.

He said the optimum investment in gold for any long- term institutional investment portfolio ranges from 4 per cent to 10 per cent.

Rarity factor

Governments can print as much money as they like - to pay off their debts - but they cannot create gold, which is limited in supply.

'In all of history, only 161,000 tonnes of gold have been mined. This is barely enough to fill two Olympic-sized swimming pools, and of this amount, more than half was extracted in the recent 50 years,' said IPP Financial Advisers investment director Albert Lam.

Outlook for gold

Despite the risk of prices reversing in the short term, financial experts say investors should add gold to their portfolios if they have not already done so.

'Worrying too much about a short-term pullback risks missing the bigger medium-term picture which remains very positive for gold,' Dr Oliver said.

One key reason for gold's rise is that central banks in emerging countries such as China and India are becoming buyers as part of a strategy to reduce the exposure of their foreign exchange reserves to paper currencies.

In the past, central banks focused on accumulating paper money such as the greenback, but they now want to hold more gold for diversification purposes.

'Over the past five years, central banks and governments have sold around 440 tonnes of gold every year,' Mr Schnider said.

'In the coming years, central bank gold sales should come to a halt. In fact, we actually foresee that central banks may become net buyers.'

But experts also caution that investing in gold is highly speculative and prices can be volatile. After rising to new highs in 1974, gold prices plunged, falling to about US$100 in mid-1976 from about US$200 at the start of 1975.

'Animal spirits can play a huge role in the determination of the gold price. This can make for a volatile ride over time and suggests that gold should not dominate an investor's portfolio,' Dr Oliver said.

Animal spirits - a term coined by the late British economist John Maynard Keynes - refers to a particular sort of confidence, or 'naive optimism'.

Rather than dabble in gold alone, Dr Oliver suggested that investors have exposure to a broad basket of commodities.

Mr Shrikant Bhat, Citibank Singapore's head of wealth management, urged investors to understand the factors driving the gold price movement and then take a view on whether those factors will continue to drive the demand.



Post Date: 17 Dec 09