GOLD REACHED a record nominal high over $1,900, and more importantly for Irish people €1,300 per ounce, on Tuesday of last week. A correction later saw prices fall sharply to near $1,700/oz and €1,200/oz before rebounding again to $1,830/oz and nearly €1,300/oz yesterday on euro weakness.
Investors, institutions and many central banks are diversifying into the commodity to protect themselves from the real risks posed by a global recession, by the intractable EU and US debt crises, from currency debasement and from financial and systemic contagion.
August saw gold rise by more than 12 per cent, while most stock markets were down by between 6.5 per cent (SP 500) and 20 per cent (Frankfurt DAX).
The Irish Stock Exchange ISEQ was down by 8 per cent, while the broader MSCI World Index was 6.5 per cent weaker over the month, showing the importance of global diversification.
Gold has risen roughly 18 per cent per annum in euro terms since the outset of the crisis, and in doing so has confounded many financial and economic experts.
Since hitting a nominal high of $850/oz and €650/oz in early 2008, there have been many simplistic assertions that gold is a bubble.
We pointed out that gold is a safe haven asset and that the price would have to reach $2,500 just to reach the (inflation-adjusted) high dating back to 1980.
Today gold remains more than 30 per cent or nearly $700 per ounce below that level.
JP Morgan recently forecast that the precious metal would reach $2,500 before the end of 2011. Cazenove Capital has said it could rise to over $8,000 in the coming years.
Other respected analysts say gold will rise by more in euro or local currency terms.
The continuous “gold bubble” mantra by some is unfortunate. Many of these same experts failed to warn of the risks posed by the leveraged Irish property bubble and by over-concentration in that sector and in Irish “blue-chip” bank shares.
Diversification is still not understood. This is why some got gold spectacularly wrong and some continue to do so.
There is now a large body of academic evidence showing gold’s importance in a properly diversified portfolio. Trinity’s Brian Lucey and Constantin Gurdgiev recently completed an academic paper on gold which was presented at a conference hosted by the Bank for International Settlements, the ECB and the World Bank.
It shows gold’s importance in diversification long term due to its “unique properties as simultaneously a hedge instrument and a safe haven”.
In the west, gold bullion remains very “under-owned”. It is a fringe asset class owned by some institutions and a minority of more informed and risk-averse people. In the east, demand from China, India and Asia has grown massively as Asians believe in gold as a store of value. The banning of gold ownership by Chairman Mao in 1950 – which remained in place until 2003 – means the per capita consumption of 1.3 billion Chinese people is increasing from a base near zero.
Gold remains the preserve of the smart, diversified money, and some of the largest institutional buyers of gold in the world today are pension funds and central banks.Prudent financial planners will continue to advocate global diversification and the importance of having an allocation to gold.
Mark O’Byrne is executive director of investment specialist GoldCore. goldcore.com
:quality(70)/cloudfront-eu-central-1.images.arcpublishing.com/irishtimes/VR3765MFOBH2NMV2QNICYDF67M.png)