Tuesday, December 6, 2011

Selling Gold

The price of gold has been defying gravity for years now. There’s no doubt that some of it is due to fundamental factors, as before this run-up, it had been stuck in a 20 year bear market and was probably undervalued: new supply has been declining for years, and the rapid economic development of India and China brought millions of new buyers. It also helped to have a massive financial crisis, which bolsters gold’s attraction as a safe haven.

But what shouldn’t be lost is the role and activities of the World Gold Council, which played a key role in making gold easier to invest in and has been unceasingly promoting gold as an alternative investment.

I’ve just got reminded of that today:

New research: Gold as a strategic asset for European investors

Independent analysis of gold’s diversification benefits for euro investors

New research by New Frontier Advisors (“NFA”) confirms gold’s unique role as a diversifier and foundation asset in the portfolios of euro-based investors, especially at a time of heightened currency and investment risk.

The report, ‘Gold as a strategic asset for European investors’, commissioned by the World Gold Council, explores gold as a strategic asset across five sets of asset allocation studies, including four using historical data spanning 1986 to 2010, and one using the 1999 to 2010 time frame.

The paper highlights that an optimal strategic allocation to gold for euro-based investors ranges from 2-3% for the most diversified and lowest risk portfolios, to 4-9% for portfolios split 50/50 between equities and bonds, to as high as 10% for portfolios with the majority of assets in equities…

…The paper finds that gold adds significant diversifying power due to its low or negative correlation with most other assets in an optimised portfolio context.

Striking while the iron’s hot? Not exactly shy are they? I don’t know if I’d have the guts to call a research paper I financed as “independent”.

I’m reminded in this context for the market for diamonds, which has had similar advocacy for the last 100 years. And diamond prices have remained elevated relative to its actual supply and demand determined price ever since, despite challenges such as artificially made industrial diamonds which are getting closer and closer to gemstone quality.

A similar story for gold? Maybe so. It’ll certainly relieve me of my biggest concern, which is gold investors being caught out in a bursting price bubble.

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