Natalie Dempster
Investment Research Manager, World Gold Council
FT Business 2007
The purchasing power gold has not diminished since Biblical times. According to the Old Testament, during the reign of King Nebuchadnezzar, an ounce of gold bought 350 loaves of bread. Today, an ounce of gold still buys 350 loaves. The value of gold therefore, in terms of real goods and services that it can buy, has remained remarkably stable. In contrast, the purchasing power of many currencies has generally declined. There is a growing body of research to bolster gold’s reputation as a protector of wealth against the ravages of inflation. Market cycles come and go, but the metal maintained its long-term value.
So gold is often bout to counter the effects of inflation and currency fluctuations. In fact, extensive research from a range of economists has consistently shown that, in spite of price fluctuations, gold has consistently reverted to its historic purchasing power parity, and during periods of financial, economic and social turmoil, gold has been a safe refuge when the value of other assets was all but destroyed.
In volatile and uncertain times, we often witness a flight to quality, when investors seek to protect their capital by moving into assets considered to be safer stores of value. Gold is among only a handful of financial assets that is not matched by a liability. It can provide insurance against extreme movements on the value of traditional asset classes that can happen in unsettled times.
On fact, statistical analysis shows that over the last 30 years, the correlation between gold and the Dow Jones Industrial Average actually declined during the worst 36 months of the equity index – an indication that investors in gold had the protection they sought when they needed it the most.
Amid the uncertainty surrounding mainstream asset classes, risk management has become a hot topic. Alternative investments, by definition, skirt the constraints of rigorous benchmarking. As a result, a variety of alternative assets are being promoted as portfolio diversifiers. Among them may be found hedge funds, private equity, commodities, real estate, timber and agricultural land and fine art. But when people talk of their portfolio diversification benefits, it should be remembered that buying them is one thing. Selling them when one needs the cash is quite another.
Gold’s liquidity is one of its critical investment attributes. Gold can be traded around the clock in larger size, at narrower spreads and more rapidly than many competing diversifiers or mainstream investments.
There are a number of alternative ways to invest in gold including bullion coins and bars, mining equities, gold exchange traded funds or special funds. The attractiveness of each of these depends on a number of factors. Does the investor want to own gold or does he simply want the exposure to gold price fluctuations? Is the investor comfortable with the idea of leverage and margin calls or not? Does the investor understand the fee structures attendant upon each type of product? Regulatory constraints may also restrict access to certain types of investments and this is something else to take into consideration. These apply regardless of the particular set of reasons driving an investment strategy.
Easy access – It has never been easier for and investor to access gold – ranging from the traditional coins and bars to the relatively recent addition of exchange-traded funds. With gold’s role as a portfolio diversifier, a hedge against inflation and exposure to the dollar, there are several compelling arguments for investing a portion of one’s portfolio in the yellow metal. The real value of gold is not that it provides a quick, speculative fix, but its capacity to provide a sure and steady means of protecting wealth and enhancing the consistency of returns whilst maintaining a low portfolio risk.
