Gold- A global currency

A commodity that has proven the test of time and has actually attracted investments is gold. Economic downturn or not, gold has been a consistent performer as compared to equity and bonds.

According to the World Gold Council, this consistency in performance lies in the diversity of demand and the motives that underpin it, not to forget the diversity of supply. However, Supply is not only regionally diversified, but it also has a natural stabiliser in play. That is the recycled gold.

Most of the gold that has ever been mined sits in a form that can be brought back to the market at the right price. A sharp spike or fall in the gold price will often trigger a surge or fall in the flow of recycled gold, which in its turn acts to stabilise the price.

Sameer Mieralli, MD of Dubai Commodity Asset Management believes that gold is a multifaceted asset.

"It’s flexible and has always been supported by economy. Even when the supply has slowed down the demand for investment has increased, and many institutions now include gold to have a risk adjusted portfolio," he says.

Gold’s Bull Run

Be it through institutions or individual investors, a lot has been invested in this commodity that has definitely seen a bullish rally.

Sujay Patil, Senior Manager, Corporate Banking, Diamonds & Precious Metals, HSBC Bank Middle East Ltd points out that gold prices will average at $908.41 an ounce this year, up 4.8 per cent from 2008. Based on reports from GFMS, a London-based precious metals research group, Patil says prices may cross the $1,000/oz mark with $1,100 an ounce a real possibility.

"Demand for gold in the Middle East has remained buoyant over the years despite higher gold prices, and is increasing year on year. Recent reports said the demand for gold, as an investment product, has surged to the highest levels in the Middle East, rising more than 140 per cent in the first four months of 2009,” He adds.

Any dips in gold prices are well supported, both by financial markets and by jewellery buyers in the traditional markets such as India and the Middle East, and consumers who had the opportunity to reap profits, are looking for those price dips to buy that gold back.

Commenting on the surge in flows that has been experienced in western markets, Mieralli saw plenty of reasons for it to continue.

“Up until June 2008, most western investors and investment managers had no exposure to gold, and it was only in the latter part of 2008 that commodity prices and other assets started to see gold as a unique and true diversifier. Yet, global allocations to gold are still below 1% giving a clear indication that investors are not overexposed to gold. In fact, most institutions and investors globally still have little or no allocation to gold.”

To experts, whoever shifted to gold did it as a long-term strategy. Attitudes towards risk have changed, and investors are rethinking strategic allocations and searching for assets that can provide protection during difficult economic conditions. And gold has shown that it can provide such protection.

Profitability of Gold

The distinction between buying physical gold and gaining exposure to movements in the gold price is not always clear, especially when it has always been possible to invest in bullion without actually taking physical delivery.

There is a strong argument as to why investors should have an allocation to gold across the economic cycle. World Gold Council has seen few assets emerging as true diversifiers in the past few years. The council argues that most portfolios are heavily weighted towards assets where returns are cyclical in nature, and this leaves investors exposed during a harsh economic downturn. Reflecting the uncertainty that is always a part of financial markets and asset markets, a small allocation to an asset that has the ability to behave counter-cyclically should be a core part of every portfolio.

In the current environment, this uncertainty remains higher than usual. The uncertainty surrounding the US dollar and other currencies, asset markets, economic activity, default rates, counterparty risk and inflation all suggest that risk levels are higher than normal. What is certain is that gold can provide a form of portfolio insurance during this period of uncertainty.