18/11/2010 - 00:00

Gold back as a hedge against uncertainty

18/11/2010 - 00:00


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The people of the world have re-embraced gold as something they trust more than government paper.

TIPPING the future price of gold is a mug’s game sensible people refuse to play. But, follow the logic of the man who runs the World Bank, Robert Zoellick, and you can’t ignore the future role of gold, and the likelihood that it will eventually settle at a very high price.

For investors, the argument mounted by Mr Zoellick is also a compelling reason for gold, in one of its many forms, to be an essential component of a balanced portfolio.

The trick is to know in what form you should own gold, which boils down to the ultimate question in business – whom do you trust?

Before considering the many faces of gold, a diversion into Mr Zoellick’s thoughts, remembering that he is not just boss of the World Bank, he is effectively banker to the world.

The current round of the great gold debate started last week with a personal contribution from Mr Zoellick to London’s Financial Times newspaper which called for a new cooperative monetary system which should consider employing gold as a reference point of market expectations about inflation, deflation and future currency values.

Said quickly it sounds simple; after all, gold has combined the virtues of currency, commodity and body adornment for at least 5,000 years, somewhat longer than any paper currency.

But for Mr Zoellick to suggest a role for gold in the future defies the edict of the World Bank’s co-founder, John Maynard Keynes, who called gold “a barbarous relic”. That view of the 20th century’s greatest economist killed interest in gold for decades.

Now, in what seems like a re-run of Arnold Schwarzenegger’s famous line from The Terminator movie (“I’ll be back”), gold has re-entered the language of central bankers.

Not everyone accepts Mr Zoellick’s case for gold, but that’s largely because of a knee-jerk reaction inspired by the teachings of Lord Keynes, and because they haven’t tried to understand what he’s saying.

Mr Zoellick is not advocating a return to a ‘gold standard’ whereby the world’s currencies are pegged to gold. He is saying that gold has a role to play alongside paper currencies because it reflects international unease in the strength of major economies, and that, in his words, gold “is the elephant in the room” that is being ignored by policymakers.

Wise investors will be following the latest debate about the role of gold with great interest because even if it does not make a full-blown return under a gold-standard banner, gold is definitely back as a reserve currency, whether governments agree or not – because the people of the world have re-embraced gold as something they trust more than government paper.

Mr Zoellick argues that: “Gold is now being viewed as an alternative monetary asset. Gold has become a reference point because holders of money see weak or uncertain growth prospects in currencies other than the renminbi (China’s currency), and the renminbi is not free for exchange. So in relative terms, gold is appealing to people who ask where I should put my money. It is a hedge against uncertainty.”

Gold ... how much?

NOW that the world’s banker has explained why gold is back, and central banks have reversed their policy of selling gold and are now net buyers of the stuff, how can the average investor acquire gold, and how much should be in every portfolio?

The answer to the how much question is somewhere between 5 per cent and 10 per cent of the value of a portfolio – about the same ratio that governments have squirreled away in their central banks.

The answer to the first question, how to acquire gold, depends on your appetite for risk.

The purest method, and the one which is remarkably easy for people living in Western Australia, is to toddle off to the Perth Mint, hand over a cheque, and three days later walk away with a bar or two of gold – and then make a mad dash to the nearest safety deposit box in a bank vault to lock it away.

Experience the pleasure of owning a bar of gold, or a handful of pure-gold coins, and you also experience the pain of responsibility and fear of someone stealing a remarkably portable asset.

Next step down the gold ownership path is a certificate of deposit with the mint, available in a variety of forms and at variable cost; but if you go this route you also discover that all you have really bought is a promissory note, a promise from the mint that it will look after your gold, undoubtedly a promise of the highest calibre, but a promise nevertheless. It is not physical ownership.

From the premium quality promise of the mint follow a series of lesser promises from companies that operate a variety of gold-trading mechanisms, including the very popular exchange-traded funds, or ETFs, which offer to back your cash with gold – somewhere.

The gold trail then leads off to companies that mine the metal, to companies that explore, but haven’t yet found anything.

At each level the risk factor rises, and while it might seem impolite to suggest that the rush back into gold will also be attracting dodgy boys with their get-rich-quick schemes, that is exactly what will happen with foolish investors soon parted from their cash because they do not look at the risks involved in owning gold.

But, while you consider the ins and outs of gold, keep Robert Zoellick’s argument high in your thoughts because when the world’s banker says gold is back you really shouldn’t ignore that advice – even if it is over the body of Lord Keynes.

In top company

BEING Australia’s richest person is quite an achievement by Andrew Forrest. Perhaps even more interesting is that if Mr Forrest lived in China he would already be that country’s third richest person. With about $6.8 billion to his name, based on the latest share price of Fortescue Metals Group (and the rising value of the Aussie dollar), Mr Forrest comes in behind China’s richest man, Zong Qinghou ($US8 billion) and Robin Li ($US7.2 billion). Well done, Comrade Andrew.


“The first step towards madness is to think oneself wise.”

Fernando de Rojas



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