Is Gold Always the 'Gold Standard'?

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 infation,
defation and most importantly currency
devaluation.
Statistics released by the World Gold
Council support the notion of ‘Gold
is good’ as the research confrms that
emerging economics such as Mexico,
Russia, China, India, Korea and Tailand
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 proft over a three year period as
the value of their investment doubled.
Gold as part of an investment portfolio
will remain an efective infationary 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 frm
such as Rio Tinto. Tis approach allows
access to commodities which would have
been previously available due to capital
requirements and expertise in managing
the investments.
Te Myth of ‘the Safe Bet’
Te concept of gold being a bubble is not
farfetched. As the old adage goes “what
goes up must come down”.
Prior to the fnancial meltdown of August
2007, investors’ had utmost confdence
in real estate, specifcally in residential
real estate investments.
Te 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 fawless. Furthermore,
sophisticated fnancial 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
diversifcation benefts.
To Gold or not to Gold?
Te 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 infation, 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 diversifcation and hedging
needs that investors require during these
uncertain economic times of infation,
inept fscal 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. Terefore, investing in gold for
the moment is a “Safe Bet”, if there is one.
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By: Yasin Ebrahim
ABOUT THE AUTHOR
Yasin Ebrahim is a freelance journalist
researching developments in the alternative
investment feld through exposure in
traditional and social media. His background
in risk and investment management coupled
with leading industry qualifcations; Financial
Risk Manager (FRM), Chartered Alternative
Investment Analyst (CAIA) provide him with
a sound background to explore alternative
investments.
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