Sent: 07-07-2009 13:36:02
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Investment Roles for Gold
The unique investment status of gold rested to a large extent on the absence of competitive products. Today, when the need for safe havens is more striking than ever, gold has not responded as well as we might have expected.
Financial market conditions during the past 18 months should have suited gold-related investments. If anything, the gold price reaction and the share price responses of gold producing companies to the global credit crisis have been disappointingly weak.
An article in the AllThingsConsidered e-mail on 24 February discussed the poor returns from gold related investments despite the precious metal seemingly enjoying some of the best conditions imaginable for an appreciation in its price.
The article highlighted the possibility that, over time, the historical role of gold as a protective haven against the shortcomings of fiat currencies could be gradually coming to an end. That would not happen abruptly. Rather, over a long time, competing investments would gradually erode its historical position and eventually take its place.
There is a lengthier discussion of these and other issues relating to the use of gold as an investment asset in Editions 57 and 58 of the monthly ATC Digest. Readers can sample a free copy or subscribe from http://www.atcbiz.com.au/digest.php.
The first of the two ATC Digest articles picks up on the thoughts contained in the February e-mail. It focuses on the background to gold being accorded a unique status among investments and the potential advantages for portfolio construction from using gold as an asset.
Shares in gold producing companies are an intuitively attractive alternative to physical gold as an investment medium. The second ATC Digest article discusses the role of gold-related equities and their connection to movements in the gold price.
As always, there will be specific circumstances under which broad conclusions do not hold but the balance of the data seems to support five conclusions about the role of gold and gold related equities.
- Investors have been given access to a fast multiplying array of alternative investment products as barriers to the international movement of funds have been demolished. From being one of a very few international assets in which people could invest, gold is now just one of many.
- In expecting gold prices to rise, we are relying on a continuing act of faith rather than anything more substantial since the market price drivers are less geared to movements in the underlying market than for other commodities and more reliant on confidence and sentiment.
- The low correlation between gold returns and the returns from other investments can assist portfolio construction but gold is by no means uniquely qualified in this regard with other products potentially offering the same facility.
- Using gold equities as a substitute for gold bullion provides some additional leverage to gold price movements, on average but not always.
- The probability of the expected positive relationship between bullion prices and equity prices failing to hold is significant and represents a large ongoing risk to the use of gold equities as a bullion price surrogate.
These are the five principal conclusions to come from the analysis and discussion of the gold market contained in the two ATC Digest articles.
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