Gold bug is really biting: van Eyk

The initial flight to gold in the wake of the Global Financial Crisis (GFC) has been sustained as the world worries about the looming inflationary effect of massive stimulus packages rolled out by the US and European governments to stave off the worst of a world recession.
“While the gold bug has bitten some more than others - with one particularly feverish commentator predicting the price will hit $5,000 – a more pragmatic investment approach is required,” said van Eyk chief executive Mark Thomas.
He said there were four good reasons why investors should hold a small proportion of their portfolios in gold-related investments. Gold is thematic and will tend to be driven by one or two of these reasons at any one time:
. Risk management - during times of perceived heightened market risk, gold is seen as a store of value.
. Global currency – gold is a liquid asset class and is often considered as a hedge against inflation or political risk.
. Market arbitrage opportunity – with limited supply, gold price moves can be sudden and dramatic, providing extensive opportunity for arbitrage.
. Trades as a commodity – there continues to be a gap between mine supply and demand for gold, with supply anticipated to decline in the next three to four years.
“Right now gold is seen as a risk management tool as well as a currency,” he said. “There was a ‘back to the future’ feeling about gold in global investment market circles.
“Gold has come and gone as a global monetary standard a few times in the past century as dominant nations such as the UK and US dropped the gold standard to permit inflationary financing of war efforts, such as World War I and the Vietnam War.
“During periods of relatively stability and central bank commitments to low inflation economies, nations were prone to run down their gold reserves.”
While the US dollar has been the world’s reserve currency for more than 40 years, many nations are starting to question the greenback’s future.
In the past month, the Reserve Bank of India has been an active buyer of gold, spending more than $US6.7 billion for 200 tonnes from the IMF and pushing along the gold price. It has been calculated that the RBI has made $US800 million on the investment in just three weeks.
Even smaller countries have been buying IMF gold for reserves as the US dollar steadily declines.
“Gold is not simply a play on perceived inflation expectations or periodic US dollar weakness, but an important hedge against monetary instability,” Thomas said.
“There is no reason to own gold or gold stocks during a period of relative monetary stability, akin to the disinflationary conditions that occurred from 1980 to 2000.”
But what is getting commentators excited is that the gold price is still well below the previous peak (1980) in real or inflation-adjusted terms. The 1980 peak of US$850/oz, when adjusted for inflation, is more than US$2000/oz – so there is still scope for a significant rally in the nominal gold price.
“But, if as expected, we are to see over the next few years, a titanic battle between the deflationary forces of the world's biggest credit and asset bubble bursting versus the unprecedented and potentially highly inflationary monetary policies now being unleashed in most of the major economies, then it would be prudent to continue holding gold as an insurance policy,” Thomas said.
This scenario supports the argument for holding gold, and unless investors assume a return to fair weather with benign conditions in the global economy, and that the imbalances of the past decade have been resolved, van Eyk recommends continued exposure, notwithstanding the considerable volatility and currency based fluctuations in the sector.
With this in mind, van Eyk has helped to devise the Gold Bullion Fund, one of the series of products in the van Eyk Blueprint Series of funds.
“The fund provides clients with diversification benefits for their portfolios and has the potential to work as a defensive asset in inflationary periods and as a haven in times of financial market stress,” he said.