LONDON, 28 July 2003 — Gold has always been intriguing to mankind. People have envied those who have it, pitied those who do not, and fought or robbed one another to obtain more of it. A primary motivation for owning gold is its security in times of trouble. National currencies have been devastated by inflation or government bankruptcy. Gold, on the other hand, has generally been a good store of value. Literature Nobel laureate George Bernard Shaw once said, “ if you must choose between placing your trust in the government or placing your trust in gold, then gentlemen, I strongly advise you to place your trust in gold.” It is no coincidence that French people who have suffered through many wars hold much of today’s privately owned gold.
Some of the better arguments for investing in gold have traditionally involved diversification benefits. However, for today’s investor even more relevant is the recent drop in correlation between stocks and gold. After years of little (but positive) correlation, we are currently observing a negative relationship between the two assets classes, in other words, when one of the two instruments exceeds its average returns, the other will generally provide returns below its average. Negatively correlated assets are a rare phenomenon in the financial universe. By reducing volatility without impairing aggregated returns, they can greatly simplify the structuring of an efficient (optimally diversified) portfolio.
Gold stashed away in your bank locker has most likely been your best performing investment in year 2002. The legitimate question arises, if the optimal point in time to purchase gold has been missed. Today’s price of over $360 per troy once reflects gold’s global comeback as a “save haven” investment.
The other major determinant of the strong gold prices was the weakening US dollar. Over the last two years, concerns over trade balances, mounting debt, and protectionism of the world’s greatest economy prompted investors to dump dollars and to buy gold. Since the inverse price relationship is likely to continue, an investor expecting further dollar falls is well advised with an exposure to the precious metal.
The recent fall in South Africa’s rand puts significant pressure on the economics of local mining companies. The closing of high cost operations is accelerating the country’s dwindling gold production. To the extent that other nations cannot compensate South Africa’s output deficiency, a reduced world gold supply will support higher gold prices.
Business undertakings by two of the most respected gold investors also point to rising gold prices. Seymour Schulich and Pierre Lassonde, the two biggest individual shareholders of Newmont Mining Inc., maintain their tradition of never sharing their predictions on gold prices with the public. A recent company transaction, however, offered some rare insight into their forecasts.
After a decade of hedging against downward price developments, the two engaged for the very first time in a transaction that will fully expose them to the prices of gold. The deal will only make them money if gold reaches and remains at a level well above $345.
There are four ways for you to invest in gold:
1. One can invest in gold by buying gold bullions. Problematic with holding bullions are storage issues and the risk of theft. They also produce no income until sold, and sometimes lack marketability
2. Gold certificates represent ownership of gold bullions that are stored by someone else. They are liquid and can readily be sold back to the dealer. Certificates are a convenient way of investing in gold; storage, delivery (the certificate holder can request the underlying gold at any time), and insurance is taken care of by a third party.
3. A popular way of gold ownership is in the form of shares in gold mining companies. A major advantage of investing in actual firms is the potential for periodic dividends. However, prudent investing calls for a thorough examination of gold firm’s risk profile. Cautious investors are well aware that mining stocks can be more volatile (risky) than gold prices themselves.
4. Investing in gold indices involves less risk than buying single shares. We suggest looking at the capitalization weighted Philadelphia Stock Exchange Gold and Silver Index (XAU), which includes the world’s leading mining companies.
(The information contained herein is for information only and should not be construed as an offer or a solicitation to purchase, subscribe, sell or redeem any investments. While Clariden Bank uses reasonable efforts to obtain information from sources, which it believes to be reliable, Clariden Bank makes no representation or warranty as to the accuracy, reliability or completeness of the information)
