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AHSON TARIQ ahson.tariq@aabaig.com
GOLD – A SAFE HAVEN ?
Why Gold
Gold and Inflation Investors in gold can point to a While gold has shown strong
growing body of research supporting returns over recent years, its
For thousands of years, gold has gold's reputation as a protector of most valuable contribution to a
been valued as a global currency, a wealth against the ravages of portfolio lies in the fact that it is
commodity, an investment and inflation. Market cycles come and not correlated with most other
simply an object of beauty. As go, but extensive research from a assets, as shown in the chart
financial markets developed rapidly range of economists has below. This is because the gold
during the 1980s and 1990s, gold demonstrated that, over the long price is not driven by the same
receded into the background and term, through both inflationary and factors that drive the
many investors lost touch with this deflationary periods, gold has performance of other assets.
asset of last resort. Recent years consistently maintained its Similar data and charts covering a
have seen a striking increase in purchasing power. range of countries can be
investor interest in gold. While a downloaded from our investment
sustained price rally, underpinned by In the short run, experience has statistics page.
the fact that demand consistently shown that gold can deviate from its
outstrips supply, is clearly a positive long-run inflation-hedge price, and,
factor in this resurgence, there are when enjoying a sustained buoyant
many reasons why people and period, as is currently the case, can
institutions around the world are offer opportunities for impressive
once again investing in gold. returns.
The value of gold, in terms of the real Portfolio Diversification
goods and services that it can buy,
has remained largely stable for many Asset allocation is an important
years. In 1900, the gold price was aspect of any investment strategy. ENLARGE
$20.67/oz, which equates to about By balancing asset classes of
$503/oz in today's prices. In the two different correlations, investors The sources of demand for gold
years to end-December 2006, the hope to maximize returns and are far more diverse - both
actual price of gold averaged $524. minimize risk. However, while many geographically and sectorally -
So the real price of gold changed investors may believe that their than those for many other assets,
very little over a century portfolios are adequately diversified, which helps to explain the
characterized by sweeping change they typically contain only three independence of the gold price as
and repeated geopolitical shocks. In asset classes - stocks, bonds and well as why identifiable demand
contrast, the purchasing power of cash. has remained robust in the face
many currencies has generally
of a rally that has spanned
declined.
To counter adverse movements in a several years. The value of gold
particular asset or asset class, many demand increased by 79%
investors now strive to achieve more between 2003 and 2007, and by
effective diversification in their 158% between 2001 and 2007.
portfolios by incorporating Moreover, most spending on gold
alternative investments such as is discretionary. 68% of total
commodities. identifiable demand over the five
years to December 2007 came
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AHSON TARIQ ahson.tariq@aabaig.com
from the jewelry sector, with a But research in 2004, examining the Gold is unique in that it does not
further 19% from investment and relationship between the gold price carry a credit risk. Gold is no
13% from industrial demand. This is, and the exchange rate of various one's liability. There is no risk
in itself, unusual for commodities, currencies against the US dollar from that a coupon or a redemption
where demand is typically driven by 1971 to June 2002, provided firm payment will not be made, as for
non-discretionary spending and is evidence of gold's effectiveness as a a bond, or that a company will go
consequently more exposed to the dollar hedge. out of business, as for an equity.
vagaries of the economic cycle. And unlike a currency, the value
The gold price was found to be of gold cannot be affected by the
Gold offers enhanced diversification negatively correlated with the US economic policies of the issuing
opportunities relative to many dollar and this relationship appeared country or undermined by
alternative assets. Independent to be consistent over time and inflation in that country. At the
studies have shown that while across exchange rates. The research same time, 24-hour trading, a
alternative assets and traditional established that despite this period wide range of buyers - from the
diversifiers often fail during times of (1971-2002) being one of jewelry sector to financial
market stress or instability, even a considerable economic turbulence, institutions to manufacturers of
small allocation to gold may gold was, throughout, a consistently industrial products - and the wide
significantly improve the consistency good protection against this range of investment channels
of portfolio performance during both instability and the exchange rate available, including coins and
stable and unstable financial periods. fluctuations it caused. bars, jewelry, futures and
options, exchange-traded funds,
Gold and the Dollar Another recent study by the metals certificates and structured
consultancy GFMS Ltd. examined the products, make liquidity risk very
Gold has long been regarded by strength of the link between 22 low. The gold market is deep and
investors as a good protection commodities and the US dollar. The liquid, as demonstrated by the
against depreciation in a currency's results clearly suggested that gold is fact that gold can be traded at
value, both internally (i.e. against not only a more potent hedge narrower spreads and more
inflation) and externally (against against the US dollar than other rapidly than many competing
other currencies). In the latter case, commodities, but also that it diversifiers or even mainstream
gold is widely considered to be a provides protection when most investments.
particularly effective hedge against needed (when the dollar is losing
fluctuations in the US dollar, the value), with relatively little loss of Gold is of course subject to
world's main trading currency. upside during a period of dollar market risk, as is clear from the
appreciation. experience of the 1980s when
the gold price declined sharply.
Gold and Risk But many of the downside risks
associated with the gold price are
Financial instruments usually carry very different to the risks
three main types of risk. associated with other assets, a
factor which enhances gold's
attractiveness as a portfolio
Credit risk: the risk that a debtor
diversifier. For example, should a
will not pay
central bank announce its
Liquidity risk: the risk that the
intention to engage in substantial
asset cannot be sold as a buyer
ENLARGE sales of gold, as happened prior
cannot be found.
Market risk: the risk that the to the Central Bank Gold
While this has been widely believed Agreement in 1999, this would be
price will fall due to a change in
for many years, it did not, until unlikely to have an impact on
market conditions.
relatively recently, have formal equity returns but could
statistical support. reasonably be expected to affect
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AHSON TARIQ ahson.tariq@aabaig.com
the gold price in the short run. GOLD PRICE TRENDS Gold is unique because it is both
Similarly, the specific risks to which a commodity and a monetary
bonds and equities are exposed, A review of the average annual asset. Its tendency to move
including pressure on the health of prices for the last 20 years (from independently and not be
the government and corporate 1998 to 2008) both in US$ and £, influenced by external factors in
sector during an economic reveals a 109% and 89% increase the same way as other markets is
downturn, are not shared by gold. respectively. Surprisingly, in Indian rooted in its supply and demand
Rupee terms, this increase has been dynamics. More specifically, the
One measure of market risk is over 500% during the last 20 years. geographic and sectoral diversity
volatility, which measures the In Pakistan, gold has seen a price of gold demand helps insulate
dispersion of returns for a given increase of over 230% during the last the precious metal from western
security or market index. The more 7 years alone. And this was during a economic cycles.
volatile an asset, usually the riskier it period when the investors’
is. The gold price is typically less confidence in the global financial Rozanna Wozniak, Investment
volatile than other commodity system was firm and not as shaken Research Manager, World Gold
prices. This is because of the depth as it is today. Council commented:
and liquidity of the gold market,
which are supported by the “We are not surprised by the way
availability of large above-ground gold has reacted. The gold price
stocks of gold. Because gold is initially dipped slightly in the
virtually indestructible, nearly all of wake of this week’s financial
the gold which has ever been mined market problems, because it was
still exists, much of it in near market acting as an insurance policy and
form. This means that sudden excess coming to the aid of stricken
demand for gold can usually be investors or holders and being
satisfied with relative ease. As a sold accordingly. With the
result, gold is generally slightly less cataclysmic downfall of a
volatile than heavily traded blue-chip financial institution that was
stock market indices such as the FTSE RECENT EVENTS seemingly indestructible,
100 or the S&P 500. investors around the world are
World Gold Council issues update on tenterhooks for the next piece
on gold’s response to financial of bad news. In just one day we
market turmoil have seen 6 per cent increase in
GLD, the world’s largest gold ETF,
18 September, 2008 | The gold price up from 614 tonnes to 650
rose $50 today to $863/oz at the PM tonnes. This follows evidence of
fix, the largest one day rise since widespread physical buying in
February 1980, as investors took a key gold markets around the
‘flight to quality’ to protect their world. Gold, as no one’s liability,
wealth from the corrosive effects of is looking like a good place to be
ENLARGE
the current uncertainty that has right now.”
For a broader range of volatility statistics >> spread throughout financial markets
across the globe. Like all physical In addition to gold’s safe haven
commodities, gold is an asset that attribute, the World Gold Council
bears no credit risk and therefore notes that despite the recent
involves no counterparty and is no decline in the oil price,
one’s liability. inflationary pressures in many
parts of the world remain
significant. Gold is seen as a
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AHSON TARIQ ahson.tariq@aabaig.com
hedge against inflation; while its real Gold coin sales halted after retail predicted that by September
value can vary in the short term, its rush 2008 prices will be at about $840
purchasing power has remained an ounce, almost the correct
stable over centuries. www.ft.com level just ten days ago.
These short-term factors have, September 25 2008 | The rush by Jeremy Charles, the LBMA
however, occurred on top of longer- retail investors into gold on Thursday chairman, told delegates that
term movements in supply and forced the US government to gold's role as a safe haven has
demand fundamentals that have "temporarily" suspend the sales of returned as a vengeance amid
supported the rise in the gold price the popular American Buffalo one- Wall Street's woes.
since 2001: ounce bullion coin after depleting its
inventories. "High bullion prices are here to
Mine output. The gradual stay," he said. His bullish
reduction of mine output in recent The shortage of gold coins is the comments came as many
years, with only a small number of latest sign of investors seeking a safe delegates said they forecast gold
major gold finds by the mining haven into bullion amid Wall Street prices in 2009 in a $700 to $1,200
industry, is constraining supply. woes. Gold prices this week surged an ounce range.
The cost of extracting gold has also above $900 an ounce, up about 20
increased substantially in recent per cent from its level before the Gold prices hit an all-time high of
years. collapse of Lehman Brothers. $1,030.80 an ounce earlier this
Jewelry demand. Robust global year.
jewelry demand reaching $54bn in Gold set to cement safe haven
2007, a third successive annual status Some delegates, however, said
record. In tonnage terms, overall that while they were bullish on
jewelry demand in 2007 was 5% gold prices on the short-term
http://www.ft.com/cms/s/0/9d0022
higher than in 2006 because investors seeking
28-8eb9-11dd-946c-
Both institutional and retail refugee and forecasted prices as
0000779fd18c.html?nclick_check=1
investors are increasingly familiar high as $1,000 an ounce, also
with gold’s portfolio warned that it was unlikely that
September 30 2008 | Gold prices
diversification benefits. The record prices could be sustained
will rise next year as the financial
reason for holding diverse during a long period as jewelry
crisis pushes more investors into the
investments is to protect the demand was likely to suffer.
precious metal safe haven, according
portfolio against fluctuations in
to delegates polled on Tuesday
the value of any single asset class
during the London Bullion Market The majority of the LBMA's
or set of assets that move in a
Association annual meeting in Kyoto. delegates – a mix of about 500
similar direction. Portfolios that
mining executives, precious
contain gold can be more robust
The gold industry forecasts bullion metals traders and brokers,
and better able to cope with
prices at about $958.6 a troy ounce bankers, consultants and central
market uncertainties than those
by November next year, according to bankers – said that the US dollar
that do not.
the annual LBMA poll among will be weaker by November
Easier access to investing in gold. 2009 than today.
Gold exchange traded funds (ETFs) delegates. The poll, which has been
have been instrumental in a reliable indicator in the past,
compares with current prices just The majority – a 56 per cent –
providing easy access to investing
above $902. said the financial system will be
in gold. ETFs have stimulated
in a better shape. A minority 21
demand because it has become as
Last year, LBMA delegates gathered per cent said the crisis will
easy to trade gold as it is to trade
in Mumbai correctly forecast gold worsen in the next 12 months,
any stock or share.
prices surging to record levels and while a 23 % said the crisis will be
basically as bad as it is today.
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AHSON TARIQ ahson.tariq@aabaig.com
Mr. Charles, who is also head of How to Invest in Gold between coins and dealers. The
precious metals at HSBC in London, premium tends to be higher for
said that investors were returning to COINS AND SMALL BARS smaller denominations. Bullion
gold as confidence in the US dollar coins range in size from 1/20
and some assets classes was shaky. ounce to 1000 grams, although
He said that the change was likely to the most common weights (in
be a structural change, rather than a troy ounces of fine gold content)
short-term phenomenon that will are 1/20, 1/10, 1/4, 1/2 and 1
fade away with calmer markets. ounce. It is important not to
confuse bullion coins with
"Gold will be looked in a different The first gold coins were struck by commemorative or numismatic
way even when the credit crisis King Croesus, ruler of Lydia in coins, whose value depends on
ends," he said. western Asia Minor from 560 to their rarity, design and finish
546BC, whose wealth came from the rather than on their fine gold
gold from the mines and sands of content. Many dealers sell both.
Jonathan Spall, head of commodities
the River Pactolus. Gold coins have For more information, visit
sales at Barclays Capital, added that
been legal tender ever since. Bullion http://www.islamicmint.com
the gold market was witnessing a
coins and small bars offer private
"sea change" as bullion was
investors an attractive way of
attracting new players, such as
investing in relatively small amounts
hedge funds, that previously
of gold. In many countries - including
considered the metal as a relic.
the whole of the European Union -
gold purchased for investment
"Hedge funds see those days gold a purposes is exempt from Value
much interesting place to be in," Mr Added Tax.
Spall said.
Bankers at the Kyoto's meeting said Small gold bars
spooked investor were so deeply
worried about the stability of the Gold bars can be bought in a
financial system, that rather than variety of weights and sizes,
just investing in gold, they were ranging from as little as one gram
placing their money into physical to 400 troy ounces (the size of
gold, taking delivery of bullion bars the internationally traded London
and coins, placing their investment Good Delivery bar). Small bars
outside the financial system. Bullion coins are defined as those weighing
1000g or less. According to
"Vault staff is doing a lot of overtime Investors can choose from a wide industry specialists Gold Bars
this weeks," a banker said. range of gold bullion coins issued by Worldwide, there are 94
governments across the world. accredited bar manufacturers
These coins are legal tender in their and brands in 26 countries,
country of issue for their face value, producing a total of more than
rather than for their gold content. 400 types of standard gold bars
For investment purposes, the market between them. They normally
value of bullion coins is determined contain a minimum of 99.5% fine
by the value of their fine gold gold. The Gold Bars Worldwide
content, plus a premium or mark-up website provides a wealth of
that varies additional information regarding
the international gold bar
market.
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AHSON TARIQ ahson.tariq@aabaig.com
EXCHANGE-TRADED GOLD allocated to each particular investor, Electronic Currencies | E-Dinar
who pays the custodian for storage
Gold-backed securities and insurance. The holder of gold in There are also electronic
an allocated account has full 'currencies' available - linked to
Gold is traded in the form of ownership of the gold in the gold bullion in allocated storage -
securities on stock exchanges in account, and the bullion dealer or which offer a simple and cost-
Australia, France, Hong Kong, Japan, depository that owns the vault effective way of buying and
Mexico, Singapore, South Africa, where the gold is stored may not selling gold, and using it as
Switzerland, Turkey, the United trade, lease or lend the bars except money. Any amount of gold can
Kingdom and the United States. By on the specific instructions of the be purchased, and these
design, these forms of securitized account holder. For more details visit currencies allow gold to be used
gold investment, all regulated www.goldmoney.com to send online payments
financial products, are generally worldwide.
referred to as Exchange Traded Unallocated account
Commodities or Exchange Traded What is e-dinar?
Funds (ETFs), and are expected to Investors do not have specific bars
track the gold price almost perfectly. allotted to them (unless they take e-dinar is the name of an internet
Unlike derivative products, the delivery of their gold, which they can based electronic payment and
securities are 100% backed by usually do within two working days). exchange system that facilitates
physical gold held mainly in allocated Traditionally, one advantage of online transactions 100% backed
form. These securities have had a unallocated accounts has been the by physical gold and silver.
major impact on the gold market, lack of any storage and insurance
representing 38% of identifiable charges, because the bank reserves e-dinar and e-dirham are the
investment and 7.5% of total the right to lease the gold out. Now electronic units used within the
demand in 2007. Financial advisors that the gold lease rate is negative in e-dinar system.
and other investment professionals real terms, some banks have begun
can provide further details about to introduce charges even on Each e-dinar electronic unit
these products. unallocated accounts. Investors are corresponds to an exact, fixed
exposed to the creditworthiness of weight of 4.25 grams of pure 24k
Gold accounts the bank or dealer providing the gold. Each e-dirham corresponds
service in the same way as they to an exact, fixed weight of 3
Gold bullion banks offer two types of would be with any other kind of grams of .999 silver. These units
gold accounts - allocated and account. As a general rule, bullion are infinitely divisible thus
unallocated: banks do not deal in quantities allowing large as well as very
under 1000 ounces - their customers small transactions.
are institutional investors, private
Allocated account
banks acting on behalf of their The physical gold and silver
clients, central banks and gold bullion backing e-dinar and e-
Effectively like keeping gold in a
market participants wishing to buy dirham units are always
safety deposit box, this is the most
or borrow large quantities of gold. equivalent or larger than all
secure form of investment in
electronic e-dinar and e-dirham
physical gold. The gold is stored in a
Other opportunities for smaller in circulation. The physical gold
vault owned and managed by a
investors include: and silver bullion is held securely
recognized bullion dealer or
in internationally renowned
depository. Specific bars (or coins,
bullion repositories.
where appropriate), which are
numbered and identified by
Transactions are executed using
hallmark, weight and fineness, are
e-dinar and e-dirham units and,
Page 6
AHSON TARIQ ahson.tariq@aabaig.com
as a rule, do not result in physical movement of gold or silver in the bullion repository. The exceptions are large
transactions of at least USD 150,000 where gold bars are physically moved between pallets.
Account holders always have the option to exchange their e-dinars and e-dirhams into any major national
currency or redeem them and take physical possession of an equivalent amount of gold dinar and silver dirham.
For further details, please visit www.e-dinar.com
Gold Accumulation Plans
Gold Accumulation Plans (GAPs) are similar to conventional savings plans in that they are based on the principle
of putting aside a fixed sum of money every month. What makes GAPs different from ordinary savings plans is
that the fixed sum is invested in gold. A fixed sum of money is withdrawn automatically from an investor's bank
account every month and is used to buy gold every trading day in that month. The fixed monthly sums can be
small, and purchases are not subject to the premium normally charged on small bars or coins. Because small
amounts of gold are bought over a long period of time, there is less risk of investing a large sum of money at the
wrong time. At any time during the contract term (usually a minimum of a year), or when the account is closed,
investors can get their gold in the form of bullion bars or coins, and sometimes even in the form of jewelry.
Should they choose to sell their gold they can also get cash.
Reference Material:
Short-run and Long-run determinants of the What sets the precious metals apart from
Price of Gold other commodities?
by Eric J Levin and Robert E Wright, 2006 by Rhona O'Connell, 2005
Inflation Protection: Why Gold Works better Why is gold different from other assets? An
than 'Linkers' empirical investigation
by David Ranson, 2005 by Colin Lawrence, 2003
Gold as a Store of Value Gold as a Hedge against the US Dollar
by Stephen Harmston, 1998 by Forrest Capie, Terence C Mills and Geoffrey
Gold as a Strategic Asset Wood, 2004
by Richard Michaud, Robert Michaud, Katharine Commodity Prices and the Influence of the US
Pulvermacher, 2006 Dollar
Investing in gold: The Strategic Case by Nikos Kavalis, 2006
by Natalie Dempster Digital Gold Currency Online Magazine - e-dinar
Digital Gold Currency Resources Issue
Malaysia-Based Mint for e-dinar
All gold related figures and stats were taken from World Gold Council’s website www.gold.org
Registration at www.gold.org is necessary to access and download the above PDF files, which is free and involves
a five-minutes process.
Page 7
AHSON TARIQ ahson.tariq@aabaig.com
Disclaimer - Whilst every effort has been taken to
verify the accuracy of this information, I do not
accept any responsibility or liability for reliance by
any person on the information, opinions or + 92 21 439 1128
conclusions contained in this document. + 92 21 455 8476
+ 92 21 876 0093
+ 92 21 454 0004
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