February 2, 2009

Gold vs. Financial

The surge of investors flocking at the mint and coin shops during the time when there were not yet online stores around happened during the 1980's when Gold reached a record high. Such was the first time the modern world witnessed the natural instinct of man toward the precious metal. "A decade ago before that during the 70's, currencies backed by gold were replaced by the money what we know today as "paper currency" or "fiat currency" or money back by nothing except trust and confidence." an economist said.

Today, as the Global Financial Crisis devastate the world's economies, another round of panic grips the market as more and more people seek to preserve their wealth through the hoarding of this precious metal.

The combination of central banks spending trillions of dollars to prop up the banking system in the worst financial crisis since the Great Depression will cause gold to appreciate at least 17 percent this year from $882.05 an ounce on Dec. 31, surpassing the record of $1,032.70 in London, according to 16 of 24 analysts surveyed by the London Bullion Market Association. The metal rose to a three-month high of $927.36 today.

Investors are typically cautious about investing in Gold because of the bad experience after the 80's when the market started to stabilize. But this does not deter investors from accepting what has gold proven to the financial industry as it cemented its role as the number one choice against the surge of inflation.

Investors typically buy gold during times of financial turmoil as a store of value. The commodity has gained in five of the past six U.S. recessions.

Last year, manifestation of shortage has already been registered by the U.S. Mint as it suspended the sales of its gold bullion coins.

he U.S. Mint suspended sales of American Buffalo 1-ounce gold coins in September after supplies ran out. The Perth Mint, producer of so-called Kangaroo and Nugget coins in Australia, said in October that it doubled output in six months. Muenze Oesterreich AG, the Austrian mint, almost quadrupled production of its Philharmonic coin in the first nine months of 2008.

Investment demand for gold bars may climb 49 percent to 201 metric tons in the first half of 2009, according to London-based researcher GFMS Ltd. Frederic Panizzutti, senior vice president at Geneva bullion refiner MKS Finance SA and the most accurate forecaster in the 2008 London Bullion Market survey, said the peak will be breached before July.

Local financial firms have already expressed their vulnerability to the crisis, as Legacy Consolidated, a local pre-need company succumbed to bankruptcy. Investors told authorities that they were enticed to invest in the company because of the promise that their investment would double in a short period of time.

“Gold is the ultimate currency hedge,” said Michael Darda, chief economist at research company MKM Partners LP in Greenwich, Connecticut, who expects gold to surpass $1,000 this year. “If central banks are going to shovel massive amounts of paper out there, gold will ultimately respond to that.”

The firm which has an asset of Php300 million in asset, owes 1 billion pesos to its investors as their plans are beginning to reach maturity.

Bullion rose 11 percent in euros last year and 44 percent in British pounds, protecting holders of those currencies as the dollar strengthened. Gold reached a record in pounds on Jan. 23.

The gain in gold denominated in euros and pounds “represents a mistrust of global economies,” said Gerry Schubert, a director at Fortis in London.

Last December, a Citigroup senior officer predicted that Gold will surge to $2000 an ounce when the price was still under $800.

“It would be absurd to think that Bernanke would be able to nail a 1 to 2 percent Goldilocks inflation rate coming out of this,” Brynjolfsson said. “What you have is competitive devaluation of all currencies around the world. Precious metals are the only hedge in this kind of environment. The trend of gold over the next five years is a straight line toward $1,700.”

Based on the data garnered by the trading of Gold versus Financial companies, local investors could have taken more profit and less risk if they have invested it in Gold. But sad to say, not everybody else can see this change coming. - quotes are from Bloomberg

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