Here is an article in the National Post's Financial section today ......not much worry about it falling out of favour... In fact after reading this ....I think this person is wrong....just wait until the USD drops from being the currency of save havens....................Richard
Nothing buffs gold better than athick coat of fear. Gold futures soared to record levels last March andinvestors have shown renewed interest in investing in the commoditythat has typically been used as a bulwark against inflation and othercurrency risks.
"Gold is a very effectivehedge against uncertainty because even as investors are watching thevalue of their equity investments plummet, gold still has value. Inthat way, gold can help diversify away some of the risks in aninvestor's portfolio," said Tom Pawlicki, a precious metals and energyanalyst at MF Global.
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Gold,a scarce metal that has incited wars, expeditions and conqueststhroughout history, has retained its value and investment appeallargely because of the gold standard, which dictated that all papermoney would be backed by gold reserves. Even though U.S. PresidentRichard Nixon quashed the U.S. dollar's direct convertibility to goldin 1971, the precious metal only gained popularity as a safe-haveninvestment since the double-digit level of inflation that plagued theeconomy during the period undermined the value of the U.S. dollar. InJanuary 1980, gold hit US$850 -- its long-standing record until thecurrent financial crisis led investors to run the price up toUS$1033.90.
Inflationary threats have beensupporting strong gold prices as investors become increasingly wary ofthe Fed's plans of pouring money into the financial system in hopes ofrebuilding asset values and evading deflation.
Therisk, of course, is that anti-deflationary actions will go too far,resulting in high levels of inflation or even hyperinflation.
TheU.S. Federal Reserve has been buying assets including government bondsto lower interest rates and ease the de-leveraging process. In order tomitigate remaining debt that's clogging balance sheets, the Fed has theability to increase the money supply until eventually enough inflationis created to absorb outstanding debt.
"However,it is not clear, with a failed banking system incapable of transmittingthe Fed's 'high-powered money' into new loans, how well or quickly sucha 'reflation' policy would work," said UBS analyst Daniel Brebner. Insuch an instance, Brebner expects gold to track inflation since itisn't tied to currencies.
Dr. John Mathis, aprofessor of global banking and finance at Thunderbird School of GlobalManagement acknowledged that hyperinflation is a threat given themassive dollar value of bailout actions. He said the challenge forcentral banks will be determining the right rate at removing excessliquidity from the system.
Hyperinflationconcerns are shared by Axel Merk, president and founder of MerkInvestments. He remains very concerned that recent policy actions willspur high inflation that the government won't be able to tame.
"Theamount of the stimulus is going to be much more than people predict. Idon't think the government has an exit strategy and there's been waytoo little effort to look ahead. They're trying everything just to propup a broken system," Merk said, adding that in the hard currency fundhe manages, they have a 14.4% allocation to gold, which is higher thanusual.
With gold acting as an effective hedge against uncertainty, deflation, and inflation, why bother investing in anything else?
Abig downfall to investing in gold is that the precious metal doesn'toffer the same return potential that equities do --particularly in arecovery environment as the current market is eagerly awaiting.
"Whenthe economy begins growing and if the Fed shows that it's on top of theinflation curve, then there's no reason to invest in gold becauseequity markets will offer much better returns," said Pawlicki. The Fedhas been selling government-backed bonds to help swallow excessliquidity. If economic stimulus measures successfully return confidenceto the market and banks loosen their grip on lending, the stock marketis likely to heat up, leaving gold in the cold.
Current gold prices seem to suggest that government actions are having their intended effect.
"Asfiscal and monetary stimuli kick in, the slowdown in the global economyis easing," said Francisco Blanch, a commodity strategist at Banc ofAmerica Securities-Merrill Lynch Research, in a recent note. "Riskperceptions are clearly on decline with the VIX having fallen 33.0%from levels above 50.0% just a couple of months ago. Equities haverisen for six successive weeks, with the S&P 500 up more than 28.0%from its low in March." Blanch also noted that as a result, gold pricesare showing less volatility.
According toPawlicki's estimates, gold prices will hold in the mid-US$950 toUS$1000 range in the near-term. Once the economy begins showing signsof recovery and investors' risk appetite improves, however, he seesprices dipping to between US$750 and US$800.
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