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BUSINESS
Will gold be able to retain safe haven status?
By
Devajit Mahanta
ON MARCH 17, 2008 gold made a history by reaching a high of nearly
$1034 an ounce. Was it because most of the world markets were going through
dark days which translate into very good days for gold or was it because of
gold was not only the currency of last resort. Or was it because it is the
piggy bank of last resort, the ultimate source of liquidity.
If gold is the safe haven asset and source of liquidity then why the metal
hasn’t performed better during the recent economic meltdown? Dave Meger,
Managing Director of Alaron Trading in Chicago says that gold remains a safe
haven asset and it has weathered much smaller percentage decreases in price
than other commodities while avoiding the extreme volatility seen in other
financial instruments.
During this time of geo-political tension and global meltdown causing
nationalization of Fannie Mae and AIG, bankruptcy of Lehman Brothers after
158-years on markets, collapse of home values, implosion of global stock
markets, the biggest fall in industrial production in 34 years and an
unprecedented shattering of confidence in financial assets, the investors
are searching safety anywhere they can get and gold has acted as a safe
haven. It would be worse run events for paper money after the disappearance
of the investment banking industry and the largest bank failure in the
history. Take a look at the way the gold has performed through this global
meltdown period. When the crunch started in August 2008, gold price was
$667 an ounce and with the system starting to creak, gold steadily climbed
all the way up to $1033 an ounce in mid-March.
During the last five-year period gold has consistently given 20 percent
returns per annum. Most of the investor’s money went to gold, as insurance
against the global turmoil.
India is the largest gold
consuming country in the world and China has the fastest growing
economy in the modern history and both these countries are in the process
of liberalizing the import and sale of gold laws, which will facilitate
gold purchases on a huge scale.
One of the most effective ways to protect wealth created in the stock
during this financial crisis period is to invest in gold, which is a
negatively correlated asset to stocks. There are six primary reasons why
investors treat gold as a safe haven investment. These are hedge against
inflationary pressure, hedge against a declining dollar, safe assets in
times of geopolitical and financial market instability, as a commodity
based on gold’s supply and demand fundamentals, store of value, and finally
as a portfolio diversifier.
The Federal Bank of America’s
monetary policy and economic outlook substantiated by recent economic data
like housing mortgage, employment report, consumer durables, etc., pushed
dollar to under-perform which could be positive for gold to attract
investors for using gold as an attractive investment option. Still worst
may yet be coming as on taking more debt and printing more dollars to clean
up this mess will force people to invest in gold.
Major economies of the world are seeking to raise their gold reserve as
fears of a sharp depreciation in the US dollar, which is appreciating at 25
to 30 percent against most currencies around the world.
Gold can preserve as an asset class because it will always maintain an
inherent value and will not get lost in an accounting scandal or a market
collapse. A combination of underperformance in other assets and the falling
interest rate environment are boosting the appeal of gold. In a future
where every currency is competitively devaluing, where everyone is racing
for the bottom of the hill, gold as the world’s oldest form of money will
outperform them all.
Readers can send their feedback at devajitmahanta@gmail.com
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