Confidence In Gold On The Road To Recovery
The fallout from the financial crisis has pervaded all sections of the investment community, eroding investors' wealth and confidence. Private investors, in particular, are still struggling to define a clear path forward to recovery.
Globally, it has been estimated that by the end of 2008, high net worth investors had lost around 20 per cent of their assets1; real estate investments had nearly halved; and global mutual funds had declined by $4.5 trillion2 in value. As we turn the corner of a new decade, rebuilding long term savings and investments represents a substantial challenge.
The search for assets that can be relied upon to protect wealth and stabilise investment strategies has driven investors back to one of the oldest assets known to man, but one that can also now be proven to offer unique benefits in the context of contemporary investment strategies, and that is gold.
While gold's role as a safe haven and protector of wealth in uncertain times has certainly helped support its recent sequence of record-breaking price highs, it is worth noting that its value was on the rise well before the first dark cloud was spotted on the horizon. The annual average price has risen for seven consecutive years. At the time of writing, the price is 143 per cent higher than on the same date 5 years ago.
The most significant driving force behind gold's sustained bull run has been the growth in investment demand. While jewellery markets have undoubtedly been hit by high local prices and the severe constraints on discretionary spending imposed by the credit crisis, it is fair to say that this has been more than compensated for by the surge in demand from investors.
However, although gold is now increasingly in the spotlight, it was for many years neglected by the vast majority of investors, in a financial environment characterised by a glut of exciting new products, and the promise of bountiful and rapid returns. Even those attracted to its long term wealth preservation and inflation hedging properties often found it cumbersome to access, not wishing to be burdened by issues of physical ownership, storage and security. Fortunately, the arrival of the gold exchange traded funds (ETFs) did much to address these concerns, simplifying access to gold as an asset by allowing it to be bought and traded on stock exchanges just like any share. Gold ETF holdings now represent over 1,700 tonnes of gold, worth around US$55 billion. To put this into perspective, the 1,100 tonnes or so of gold currently held by the market-leading SPDR Gold Shares ETF is more than the gold reserves of many central banks, including those of Switzerland, China or Japan.
