Global uncertainly drives up demand for gold

Global uncertainty and inflation concerns are driving up demand for gold as a capital preservation tool.

Investors are especially bullish on exchange traded funds (ETFs). Global investment in gold ETFs over the third quarter was up by 56% on the previous year, according to the World Gold Council’s Gold Demand Trends Report.

But Hakan Kaya (pictured), vice president at Neuberger Berman, portfolio manager for the commodity strategies, is not convinced ETFs are the best way to access the asset class. He says: “We prefer the futures market to trade gold. They are very liquid, so allow us to get in and out of positions quickly and efficiently.”

Although ETFs can be a good way for investors to buy into the asset class, they may not always track the index in the most efficient way, and there is a cost drag accompanying them on top of that.

Kaya’s portfolios tend not to invest in gold mines or gold mining stocks. Kaya says they are much more prone to market movements and company related issues, and tend to have a higher correlation with the S&P 500 than with gold stocks, so investing in them “would be an S&P bet, not a gold bet.”

Bullion is also becoming a popular bet for investors, especially in the retail segment. Gold trading volume has recently surged in London, which has been tagged the gold trading capital of the world.

Daily clearing volumes for gold this autumn are reaching the highs of last summer, according to a report by Gold Speculator based on recent data from Bullion Vault and the London Bullion Market Association (LBMA).

Andy Baker, corporate development manager at IMGold, a buy, sell and depository services provider, says “there is no doubt about gold demand. Investors are either with it or in denial.”

IMGold is about to launch a new platform at the end of the month to allow investors easier access to the asset. Clients will be able to purchase gold quickly through this platform and ensure it is deposited in a secure, economically and politically stable environment.

Baker sees a strong local market of UHNWI, HNWI and the wealth management companies that service them. London and the City market are always a key source of revenue, he says. He adds that the Isle of Man based IMGold is positioned to service other jurisdictions beyond Europe.

The demand is being driven on the one hand by the continued concerns about the impeding fiscal cliff in the US and uncertainty regarding the Eurozone rescue package for Greece, and on the other hand by inflationary pressures across the globe.

Baker says: “The fiscal cliff (increase in taxes and decrease in government spending) is as likely to happen in the UK as in the US and affect us just the same. This makes gold more appealing for those with investment capital that are looking for steady capital growth on an asset. Gold has consistently performed positively.”

In a recent report, ETF Securities says gold is likely to be one of the better hedges against a “worst case fiscal cliff” or downgrade scenario in the US. It points to last summer’s gold price rally, when it gained 30% during the Congress’s budget ceiling standoff and downgrade in the US.

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