Is gold the safe place for your money now?

Gold is regaining its safe-haven status as an earthquake rocks financial markets and makes standard investments seem more risky. Gold made its biggest one-day percentage gain in nine years on Sept. 17, shooting up more than $70 an ounce in response to a succession of U.S. government rescues of financial institutions.

Gold gained another $46 Friday to close at $897 an ounce. Gold traded at $750 earlier in the month. Of course, gold climbed past $1,000 an ounce earlier in 2008, and it was at $800 more than 25 years ago. There's no one guaranteeing we're not in for two more decades of similar price swings.

Despite the stampede into gold in times of panic, there's still this question: Why does gold matter at all? It doesn't make your car more fuel efficient. Or make the Internet faster. Or improve crop yields.

To get a better sense of what gold is worth, it's important to understand who's buying it and why. When markets panic, all sorts of people will rush into gold. The main support for gold this year has come from a strange mix of central banks, mutual fund managers, upwardly mobile Third World residents and frightened war refugees.

What do most of them have in common? They're worried about the world economy, they're worried about the true value of currencies (in many cases, the U.S. dollar), and, despite its apparent uselessness, they still view gold as a haven.

Here's a look at a few key groups driving the price of gold higher:

The increasing wealth in China and India, as well as in the Middle East, is supporting the gold price.

The biggest single buyer of gold right now is likely China's central bank. China had amassed $1.8 trillion in official currency reserves by the end of June, much of it in U.S. Treasuries. Though the U.S. dollar has regained some strength lately, the International Monetary Fund, Warren Buffett and others still see the long-term trend as down. That's a big reason China watchers think the country is converting some of its cash into gold.

China reported 600 metric tons of gold reserves at the end of June, or one per cent of its total cash reserves. At today's prices, that's about $16 billion worth, or about 20 million ounces, less than half a per cent of the estimated total gold in existence. Though Beijing is not reporting any addition of gold to its official reserves, some analysts at top trading and investment management firms believe China is quietly buying gold to diversify out of the dollar.

What we do know for sure is that Chinese citizens are increasing their purchases of gold. In 2007, Chinese retail investment in gold rose 63 per cent to 32 metric tons, according to the Shanghai Gold Exchange, as China supplanted the U.S. as the second-largest consumer of gold. Also in 2007, China ended South Africa's 102-year reign as the largest gold producer in the world, taking the top spot as its production rose 8 per cent, according to GFMS, a metals consulting company in the United Kingdom.

"Chinese consumption is growing," says Bill Reynolds, an investment adviser at Wellington West Capital, a Canadian advisory firm with 40 offices in Canada and $12 billion in assets under management. "They do like gold jewellery, and with more liberation in China, they are able to buy more. The market is so massive."

In addition, Chinese citizens, like those in India and throughout the Middle East, have a long tradition of storing family wealth in gold jewellery and artifacts. Chinese citizens are following that centuries-old tradition and buying high-karat, low-mark-up gold jewellery to store the wealth, and they now have more wealth to store, says George Milling-Stanley, the manager of gold market analysis at the World Gold Council, a body that was set up by major gold mining and trading firms to encourage investment.

Gold for oil

Another big driver of gold's recent price gains has been another commodity pulled out of the ground: oil. Not so long ago, the world's oil-producing countries took their profits in U.S. dollars, then deemed the world's safest currency. Now that the dollar has wobbled over the past year, Persian Gulf emirates rolling in profit from skyrocketing oil prices are choosing gold as their preferred store of wealth.

Though high prices have dampened demand in traditional gold-consuming countries such as India, Vietnam has rocketed ahead, with investment demand in the first half of 2008 at 56.8 metric tons, outstripping its 56.1 tons for all of 2007. Russia increased its gold reserves by 44 metric tons last year by hoarding its own gold production and buying more gold on the open market.

Storing value in the Third World

Some gold buyers in the Middle East seek bullion out of desperation. About two million Iraqis have fled the country, and 2.5 million others have been displaced within the country by sectarian violence, often with their gold jewellery sewn into their clothes. A gift of gold jewellery is a traditional part of a wedding in Iraq, and now it is also viewed as a portable savings account.

In India, too, gold jewellery is a staple of weddings. Gold necklaces, bracelets, earrings and bangles are part of a bride's wedding outfit, like a wedding veil in the United States or Canada, and a store of value. (A store of value is a way to hold your assets, a way that is more portable and more liquid than, say, real estate or cattle.)

While it is also an attractive asset for investors and government bankers, 70 per cent of newly mined gold still goes into jewellery.

Despite a recent consumption slowdown caused by soaring prices, India remains the world's top gold buyer. Poorer citizens there continue to prefer simple 24-karat bracelets and necklaces that reflect the value of their gold content, says Milling-Stanley, of the World Gold Council.

The traditional gold purchases are simple chain-link necklaces or bracelets with virtually no design so that the value of the jewellery is pretty much equivalent to the value of the gold.

India's growing middle class, though, is increasingly imitating Western styles, buying jewellery with a strong design component, Most Western jewellery is designed to some aesthetic effect, and there is a premium included in the price of such jewellery for the designer's work. Middle-class Indians, unlike their poorer cousins in the country, are also turning to this designed jewellery.

The buttoned-down buyer

Then there are investors, large and small, who have increasingly turned to gold as a place to keep a portion of their portfolios. Wellington West Capital's Reynolds reports that most of his company's clients, who are spread across Canada, are invested in gold, with 10 per cent of their portfolios in the metal on average.

"People like to hold it," Reynolds says. Most of the holdings, he adds, are in the form of gold futures traded on the New York Mercantile Exchange. Those are contracts based on a projected price for gold on a certain delivery date.

The rise of exchange-traded funds, which hold physical gold, have created another huge source of demand, giving even small investors an easy way to buy and sell gold.

The SPDR Gold Shares (GLD.N) ETF, launched in 2005, has gone from zero gold holdings to nearly 19 million ounces, or 590 metric tons, worth about $15.2 billion at recent prices. The first gold ETF, Gold Bullion Securities (GBOSF.N), was launched in Australia in 2003, and now it and its affiliated ETFs, sponsored by the World Gold Council, hold 628 metric tons. That's roughly 0.5 per cent of above-ground gold. ETFs generally buy their gold from bullion dealers in New York and London and store it with the dealers, many of whom have their own vaults.

Will the march higher resume?

While gold and oil prices retreated over the summer, Reynolds says the fundamentals, particularly the weakness of the dollar, favour a return to higher prices. "I think we'll see oil at $150 a barrel and gold over $1,000," he says.

And as the economic uncertainty continues, investors may seek a haven for many months to come, Milling-Stanley says. Gold's previous record high of $850 in 1980 would be equivalent to about $2,225 now, adjusting for inflation. So while this year's $1,000 an ounce was nominally a new high, gold hasn't even kept pace with inflation over the past 28 years.

"In the years ahead, we will discover gold's true value," says Shayne McGuire, an investment adviser with the $115 billion Teacher Retirement System of Texas and author of "Buy gold now." "I think it's several thousand dollars higher than what we see today."

McGuire sees the long-term weakness of the dollar as the main support for gold prices. The current level of debt in the U.S. financial system is at historic highs and well beyond those of a typical cycle.

"All currency crises have been caused by excessive debt," McGuire says. "The mere possibility that such a crisis can occur in the dollar makes gold valuable as a hedge."

Two ways to invest

So what should you do?

Many analysts are encouraging investors to put up to 10 per cent of their portfolios into gold. Gold coins, such as the Canadian Maple Leaf or the new American Buffalo, are an easy way to invest in physical gold. You can buy gold coins online at specialized sites or on EBay, or from local coin and bullion dealers. Just check your yellow pages.

The advantage to coins is that you can keep them at home, in a safe or strongbox, or in a personal safe-deposit box at a bank, or store them with a dealer. At Goldmoney.com, you can open an account that will allocate shares in pooled gold that is held in vaults in London and Zurich, Switzerland.

An easier way to invest that 10 per cent in gold now -- because it requires no physical delivery or the storage and insurance costs that go along with it -- is through ETFs. These funds, such as SPDR Gold Shares, hold allocated bullion corresponding to the shares issued. The whole key to the ETFs is that shareholders know their investment is backed dollar for dollar by physical gold. The SPDR fund, which is marketed by Boston's State Street group and backed by the World Gold Council, is the most liquid gold ETF and accounts for more than 80 per cent of exchange-traded gold.

Not everyone is jumping on the gold bandwagon. The great 20th-century economist John Maynard Keynes decades ago declared gold a "barbarous relic," and many economists today think it's not a good long-term investment.

Wharton School professor Jeremy Siegel, who studies investments over the long term, notes that people who bought gold at $850 an ounce in 1980 would have seen growth to $15,000 and change today for each ounce they bought if instead they had invested that money in a fund tracking the S&P 500 Index ($US:INX).

But even Siegel concedes: "There's no question that when there is anxiety about the world monetary system, gold will do well. It provides a little bit of insurance during stressful times."

source: http://finance.sympatico.msn.ca/inve...