Nervous investors look to gold as safe haven
Nervous investors look to gold as safe haven
Kathleen Pender
Tuesday, June 8, 2010
Gold futures for August delivery rose to $1,240.80, just shy of its $1,243.10 record close set in mid-May.
Gold prices rose again Monday as nervous investors continued to diversify away from euros and into perceived safe havens such as gold and U.S. Treasurys.
SPDR Gold Trust, an exchange-traded fund backed by bullion, hit a new all-time high, rising $2.30 per share to close at $121.49. The fund is priced at roughly one-tenth the price of gold.
Gold futures for August delivery rose $23.10 to $1,240.80 on the Comex division of the New York Mercantile Exchange, just shy of its $1,243.10 record close for a most-active contract set in mid-May.
Gold’s recent surge – it’s up roughly 13 percent this year compared with a 5.8 percent drop in the Standard & Poor’s – goes against its stereotype as a hedge against inflation and a falling dollar.
Yet today deflation is a bigger immediate threat than inflation. And the dollar this year has been rising, especially against the euro.
There are various theories for why gold is soaring. A popular one is that to prevent recession, Western governments are printing money, causing investors to lose faith in paper currencies.
A hedge investment
“Gold is a hedge against reckless governments,” says New York economist Ed Yardeni. “When government monetary and fiscal policy is out of control, that can show up in all sorts of ways.” In the past, it typically led to hyperinflation.
“Today, we have tremendous deflationary forces unleashed as a result of the bursting of several speculative bubbles that in many ways were enabled by previous excesses in government policies, such as providing too many subsidies for housing in the U.S. and places like Spain and Ireland. Another excess has been government itself.”
Government spending on salaries, benefits and social programs has been growing faster than the overall economy. This is coming to an end. The bond market and taxpayers don’t want to fund them anymore.
To prevent a deflationary depression, governments have provided even more stimulus. Yardeni predicts the end result will be inflation or a financial meltdown, either of which would be good for gold.
The run-up in gold “reflects the fear that all the stimulus cures could end up killing the patient,” says Jim Lowell, editor of the Fidelity Investor newsletter. “There are moments when that fear dissipates and gold prices fall back a little.”
Even if these fears subside, Robert Cohen, manager of the Dynamic Gold and Precious Metals fund, says gold will do well in the medium- to long-term as Western governments print money to provide health care and retirement benefits to their aging populations.
Gold bulls point out that demand started rising well before the financial crisis. The creation of funds like the SPDR Gold Trust has made it easy for investors to own gold without the hassle of storing it. Also, many institutions that once stuck with stocks and bonds have permanently diversified their portfolios by adding gold, real estate and other hard assets. Likewise, many emerging-market governments, such as India and Iran, have decided to diversify their foreign exchange holdings from paper currencies into gold.
Unusual movement
Normally, gold and the U.S. dollar move in opposite directions. “If the U.S. economy and the dollar are strong, there is less uncertainty and less reason to hold gold,” says Marshall Berol, co-portfolio manager of the Encompass Fund, which has about 15 percent of its assets in gold companies.
Today, the dollar and gold are moving in the same direction because investors want to hedge their bets. Investors moving out of the euro are putting some money into gold and some into dollars, which despite its problems is seen as the world’s strongest currency.
“People don’t want to be 100 percent in gold. They don’t want to be 100 percent in the dollar” or U.S. stocks. “They want to have some diversification, some spreading of the risk,” Berol says.
When currency fears subside, he says investors will still find gold valuable, and reasonably priced. Although it’s trading at an all-time high, adjusted for inflation it’s well below its 1980 peak.
Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at kpender@sfchronicle.com.
