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For all ages, all that glisters is gold
Gold has held an allure for thousands of years, valued for its beauty and its unique properties as a precious metal.
- By Marcus Grubb, Special to Gulf News
- Published: 00:08 October 25, 2008
Gold has held an allure for thousands of years, valued for its beauty and its unique properties as a precious metal. Its mystique captivated the ancient Roman, Greek and Egyptian civilisations who mined the yellow metal extensively and practised alchemy - the quest to turn base metals into gold.
The ancient Egyptians considered gold to be a divine and indestructible metal and believed the skin of their gods was golden. For many years, the ancient Greeks believed gold was made of a combination of water and sunshine and in Rome gold coins were first used as currency in 50 BC.
The Gulf has its own special relationship with gold and there is a tradition in preserving wealth in the commodity, often in the form of jewellery or ornaments. Gold is given as a gift to loved ones, especially on occasions such as a wedding or at Eid and Diwali. It is still common for gold to form the large part of a bride's dowry in this region.
Gold, due to its rarity and durability, has historically been used as a method of payment. Today it is also recognised by institutional and private investors for its unique investment properties. Fund managers today employ gold within a portfolio for its diversifying and risk management benefits.
In today's sophisticated, but currently turbulent financial markets, investors are seeking exposure to gold for a range of reasons and they have access to a variety of investment options suited to their risk profiles. Gold has a proven ability to hold its value over time. It is known by the international investment community to be a good portfolio diversifier, offering value uncorrelated to other more risky asset classes.
Hedge against inflation
Gold can be a hedge against inflation, it acts as a 'safe haven' in times of uncertainty, cushioning investors from the impacts of financial crises, such as those international markets are currently experiencing. Although gold's real value may fluctuate in the short term, in contrast to most world currencies, gold has proved itself to be an effective preserver of wealth.
In spite of current fears of deflation in the US and Europe, gold's performance as a hedge against inflation is one of the key motivators behind investor purchases of the metal. This is especially applicable here in the Gulf where inflation has reached double digits in every market. In the UAE alone, inflation is estimated to be near 14 per cent over the past year.
Research shows that, while in the short run the effectiveness of gold as an inflation hedge may vary, gold maintains its purchasing power over the long term. It is also widely considered to be a particularly effective hedge against fluctuations in the US dollar, the world's main trading currency and the peg for the UAE dirham.
It is important to combine assets that behave differently in an investment portfolio. Gold is an effective diversifier because its performance tends to move independently of other investments, including real estate, an asset that many GCC investors' portfolios are currently overweight in. There is little correlation between gold and most mainstream assets. Research shows that gold sustains that lack of correlation at times of market stress.
There are commonly held misconception that since the credit crisis erupted in 2007, gold has become a volatile asset. While it is evident that volatility has increased, a comparison of gold's volatility with that of other key assets since August 2007 shows that gold has in fact remained less volatile than equities, oil, the GSCI commodity index, and other precious metals.
Gold is regarded as a safe haven for investors in times of financial instability. It has the ability to preserve its value at times when the value of many other assets has been dramatically reduced. In the current crisis, with the downfall of some of the world's most prominent financial institutions, and the knock on effect this has had on equities, bonds and currencies, investors are feeling exposed and have again turned to gold.
As a physical asset, gold is no one's liability. There is no risk that a coupon or a redemption payment will not be made, as for a bond, or that a company will go out of business, as for an equity, or that savings will be lost through a bank that is going out of business. And unlike a currency, the value of gold is not undermined by a country's inflation or growth in money supply.
Experience has shown that gold is a form of insurance. When held over the long term, it will pay out in times of political or economic crisis. This makes it a particularly suitable investment for regional investors with investments in the local less liquid equity indices and property markets for example.
Alternative ways
There are a number of alternative ways to invest in gold including bullion coins and bars and mining equities. Jewellery is currently the most popular means of investing in gold in the GCC markets. Sales in Abu Dhabi alone soared 300 per cent in volume and almost 250 per cent in August 2008, as consumers stocked up for the Eid and Diwali wedding and celebratory festivals.
Each investment option has its own merits and the most appropriate depends on the requirements and outlook for the individual investor. The newest way to invest in gold is through gold exchange traded funds which are listed on stock exchanges around the world.
Each share represents one tenth of an ounce of gold and is traded like any other share on a stock exchange. The first gold exchange traded fund in the Middle East, the Shariah-compliant Dubai Gold Securities, is due to launch on the Dubai International Financial Exchange (DIFX) later this year, providing investors with easy access to the precious metal.
It has never been easier for investors to access gold, and with gold's role as a portfolio diversifier, a hedge against inflation and exposure to the dollar, there are several compelling arguments for investing in the yellow metal. The real value of gold is not that it provides a quick, speculative fix, but its capacity to provide a sure and steady means of protecting wealth.
The writer is managing director (investment research & marketing), World Gold Council.
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