Gold: an investment you hope won't pay off

SINGAPORE Tue Feb 24, 2009 4:01am GMT

Bars of 250 gram fine gold are stored at a plant of gold refiner and bar manufacturer Argor-Heraeus SA in the southern Swiss town of Mendrisio. REUTERS/Arnd Wiegmann

Bars of 250 gram fine gold are stored at a plant of gold refiner and bar manufacturer Argor-Heraeus SA in the southern Swiss town of Mendrisio.

Credit: Reuters/Arnd Wiegmann

SINGAPORE (Reuters) - Gold is rapidly becoming the last haven in a sea of uncertainty as worries rise about the ability of not only commercial banks, but even governments, to repay debts.

With few signs that the world's worst economic crisis since the 1930s is close to bottoming out, wrung-out investors will keep on pumping money into gold-backed securities as insurance against financial Armageddon.

But like most insurance policies, investors hope it won't pay off.

"Gold is an investment you hope you never make money on. If you do, it means other markets have lost," said Stephen White, director at Sydney-based treasury advisory firm Noah's Rule.

He added: "Cash is king and gold is cash in any currency. In the short term, gold will continue to appreciate but once stability returns be ready for a quick fall, possibly similar to those we have seen in other commodities."

Gold's gains are being powered by two forces -- either of which could spell disaster for other more conventional assets classes. The first is the risk that the greenback may collapse under inflationary pressure from the weight of the trillions of dollars Washington is injecting into the economy.

The second is the risk of debt default in the eurozone as the European Central Bank keeps its more hawkish stance on monetary policy.

Alan Ruskin at RBS said the debate boiled down to two idealogies.

The view held by Federal Reserve chairman Ben Bernanke, nicknamed "Helicopter Ben" for talking about helicopter drops of money to jumpstart an ailing economy, or European Central Bank President Jean-Claude Trichet's oft-repeated mantra of vigilance.

"(There is) the guy who has the helicopter loaded and is on route to currency debasement, versus those who can't touch the printing press fueling sovereign risk and possible collapse from within."

"The intriguing aspect is that gold is now seen as a hedge against both the inflationary view of the world that is the dollar and the deflationary view of the world that is the euro."

Ruskin added that even at prices around $1,000 an ounce, just short of a record high of $1,030.80 struck last year, it was hard to argue against long gold, short every commodity tied to the real economic cycle.

Hoards of cash sit idle as investors worry more about the safety of their money than returns and banks fret about which of their counterparties will collapse next.

Iceland and Ecuador have defaulted on government bonds and worries about the health of the banking sector in a host of countries across Europe, including Ireland, the United Kingdom persist.

Other nations, including Turkey, Latvia, Hungary, Ukraine and Serbia have reached out to the International Monetary Fund for help in recent months.

"Eastern European banks -- if they default further then it will trigger the second wave of the sub-prime crisis," said Akhi Kamkolkar, Head of Futures at Halifax investments in Sydney.

"(Gold ) is the only true safe haven. The dollar is just about worth the paper it's printed on and if they keep on printing, there is really only one place for it to go."

"People are talking about pound-dollar parity, and dollar-euro parity, but something would seriously have to go wrong to get there -- at that point, across the financial world, we'd all be, well, what's a better word for screwed?"

Even the US treasury bond is considered a risk. The cost of insuring against default on 5-year US Treasuries is now 90 basis points -- it used to be nothing just over a year earlier.

"Gold could be preferable to currencies if there are concerns about the credit quality of the issuer of the paper currency. The increasing correlation between gold prices and measures of sovereign and financial risk default clearly suggests that gold has become the 'currency of last resort'," Goldman Sachs said.

And investors are listening. The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, said holdings hit a record 1,028.98 tonnes last week, up 6 percent in a week. The volume of trade doubled in 2008 to an average 13.8 million per day from the previous year.

Volumes in 2009 are even higher at 19.7 million and the fund is the world's seventh biggest holder of bullion, ranked just behind Switzerland and ahead of Japan according to most recent data.

"Just buy gold," was the advice from Mark Pervan, senior commodities analyst at ANZ Bank.

"The exchange traded funds are driving prices. The investment community just wants to find somewhere to park its money."

(Additional reporting by Vidya Ranganathan in SINGAPORE and Eric Burroughs in HONG KONG)

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