Golden age for smart investors

PUBLISHED : Monday, 28 November, 2011, 12:00am
UPDATED : Monday, 28 November, 2011, 12:00am


When investors ask if gold will hold its value, the answer is clearly 'yes' if we study the views of certain respected experts. Homer, for instance, in his Iliad and Odyssey, written perhaps 3,000 years ago, describes gold as the glory of the immortals and a sign of wealth among ordinary humans.

Before that, in about 3100 BC, the code of Menes, founder of the first Egyptian dynasty, valued gold 2.5 times higher than silver. And a bit more recently, Croesus, the king of Lydia from 570 to 546 BC, found lasting fame by concentrating his assets in stocks of the precious metal.

Over the course of millennia, some things change, others don't. Today, analysts and advisers continue to see gold as a core holding in a well-diversified portfolio. Particularly in the present investment climate, clouded by low interest rates, unresolved debt crises and the spectre of rising inflation, what made sense in ancient times basically holds as true as ever. 'Historically, gold has been a safe storage instrument for wealth,' says David Pinkerton, chief investment officer of Falcon Private Bank. 'Virtually every other choice, whether a bond, stock, ETF [exchange traded fund] or cash notes issued by a sovereign nation, has inherent credit risk or counterparty risk. As the one asset that is not a liability of another, it is no wonder gold is attracting wider interest in today's environment.'

He notes that investors have several options. They can go for the 'pure play' in buying physical gold, use a themed ETF or find instruments, such as mining company shares, which trade in correlation or inversely to the price of gold.

Assessing general prospects, Pinkerton expects the bull market to continue. Pressure to stimulate economic growth, swollen international debt levels and possible currency devaluation will all support a long-term upward trend. 'Until interest rates peak again, gold will continue to rise,' Pinkerton says. 'The price will climb above or substantially above a longer-term moving average.'

He cautions, though, that there could also be periods of volatility. This results, in part, from the size of the total gold market. It is small compared to international bond and equity markets and, therefore, more subject to movements caused by 'hot money' or, put another way, speculative trading.

'If investors can accept such movements, then a portion of their portfolio should be in gold in some form,' Pinkerton says. 'Though volatile, it will potentially retain its purchasing power better over time.'

Ken Wong, vice-president and senior product engineer for State Street Global Advisors, similarly notes that short-term reverses must be expected as in any active market. Traders will sell on peaks and, especially towards year and quarter ends, institutional investors may be obliged to trim holdings to lock in profits or cover redemptions and liabilities elsewhere.

The average retail or high-net-worth investor should not be too concerned about this. 'Gold is a good place to be, even though it doesn't pay a dividend, and it will continue to be seen as a safe haven,' Wong says.

Without being alarmist, he points out this safety factor cannot be ignored. The calendar already shows next year will be a hectic period in geopolitics, with elections or planned leadership changes in the United States, France and China. Economic uncertainties seem sure to persist despite the best efforts of politicians and central bankers.

'With these situations, we are definitely seeing more retail participation and trading in our gold ETF,' says Wong, who notes the instrument is backed 100 per cent by physical gold stored in a vault in London. 'It closely follows the spot price and, therefore, differs from mining stocks, which have more correlation with the stock market.'

A valuation of about US$72 billion makes this the world's largest such ETF.

Considering the most traditional forms of investment - gold coins, rings and jewellery - Wong acknowledges that the spending power of the growing middle class on the mainland and India will continue to drive demand.

'Remember, though, that for every dollar you pay for such items, at least 10 per cent is going for the craftwork and commission,' Wong says.

Stephen Corry, head of investment strategy for Asia-Pacific at LGT Bank (Hong Kong), is also positive about the fundamentals for gold and sees upside potential. Shares in mining companies such as Barrick and Newmont might have lagged the bullion price, but they have relatively low production costs and cash flow should be good. 'We are looking at strong balance sheets, which plays back to the yield - if they can get the gold out of the ground,' Corry says.