InvestmentsMar 19 2012

Uncertain times require certain diversifications

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ByMark O’Byrne

On hedging with gold, a leading institute has recently stated: “Gold can serve as a hedge against declining values of key fiat currencies.”

These are not the words of some so called ‘gold bug’ warning that fiat currencies are losing their value. Rather, they are part of the recent findings of the UK’s influential and respected Chatham House, or the Royal Institute of International Affairs.

“Holding gold – the world’s only independent currency – gives you some protection against the incompetence and idiocy of Europe’s bickering politicians. So keep it.”

The second quotation is from one of the Financial Times’s personal finance columnists –Money Week editor Merryn Somerset Webb.

Chatham House and Ms Somerset Webb are part of a growing band of journalists, advisers, investors and institutions who realise and acknowledge the importance of having an allocation to gold as part of a diversified portfolio.

We are living in volatile financial times and investors in the UK and internationally face tremendous challenges in the coming years.

History shows that debt crises tend to lead to currency devaluations. The one common thread that runs through the majority of economic crises throughout history is that gold protected people’s wealth from declining values in stock, bond and property markets and from currency devaluations. Similarly in recent years and again in 2011, gold has been one of the very few assets to have risen in value in all currencies and preserved people’s wealth.

Gold rose by more than 9 per cent in 2011 against the pound, the euro and the dollar or rather all fell against gold. Most currencies have fallen sharply against gold so far in 2012 and gold is consolidating around £1,100/oz, ¤1,300/oz and $1,700/oz.

Investors, pension funds and many creditor nation central banks are diversifying into gold in order to protect themselves from the real risks posed by a possible global recession, by the intractable EU debt crisis and the risk of a US and global debt crisis.

They are also diversifying into gold to hedge against financial and systemic contagion and from currency debasement.

A bubble or off to $3,400/oz?

Is gold a bubble today at close to £1,100/oz, ¤1,300/oz or $1,700/oz? Or will it rise to more than $3,000/oz and the equivalent in sterling and euros in the coming years?

Respected investors who foresaw this economic crisis such as Jim Rogers and Marc Faber say that gold will rise to thousands of dollars, euros and pounds per ounce in the coming years.

While gold has risen six times in 11 years, it is worth remembering that in the 1970s gold rose 24 times in nine years.