Worship Gold in times of recession!

January 28, 2009

Commodity Online
MUMBAI: Is there anything in the world which can challenge the supremacy of gold? The global economic slowdown has underlined once again that gold is the supreme power in the time of financial crisis and people are inclined to keep gold as their best bet at the time of crisis.

And if you thought bank shares are a better bet, just check the reports of collapsed banks during the meltdown in the US. Listed bank stocks across the world have lost $3.1 trillion in market value over the past 12 months alone, and are yet to establish a bottom.

Then check this out. Around 250 listed gold stocks around the world have risen, on a weighted basis, by more than 100% since churning along a bottom during October and November 2008.

The collapse of most commodity prices means less cost inflation, and, allied with a relatively strong gold price, gold companies remain supported by firm fundamentals.

Beyond the twists and turns in the world’s private banking sector, government central banks are generally increasingly positive towards the role of gold bullion.

China holds just 700 tonnes of gold, worth roughly 1% of its giant foreign exchange reserves, compared to 58% for the Eurozone (including Russia), with 10,911 tonnes, and 77% or 8,133 tonnes locked up in Fort Knox in the US.

The Asian cultural affinity for bullion gold is probably best described by the statistic that India houses roughly 29,000 tonnes of gold, of which the Indian central bank owns just 400 tonnes. Chinese official gold reserves may continue to increase with its country gold output; its reserves increased from 650 to 700 tonnes between 2006 and 2007 as China moved into the No 1 ranking in global gold production with 270 tonnes. From the start of 2007 to September 30, 2008 China added $840bn to its foreign exchange reserves.

Given that gold bullion traditionally ranks as a measure of a country’s economic health, its currency and fiscal responsibility, it would hardly be surprising to see China increasingly diversify its reserves in favour of the yellow metal. Much the same can be said for other rising Asian nations.

It has long been shown that gold bullion is most sensitive to investment demand, which, however, has been significantly diversified since the World Gold Council’s introduction in 2003 of gold bullion exchange traded funds (ETFs). Now, the SPDR Gold Shares ETF, the biggest of its kind in the world, holds more than 800 tonnes of physical bullion, worth more than $24bn.

In March 2009 a Shariah compliant gold ETF is planned to list in Dubai, where jittery Middle Eastern investors continue to ponder looser domestic currency ties to the dollar. Shanghai will likely follow with a gold ETF in 2010.

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