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Amid credit crunch, gold may be safe haven

By Hui Ching-hoo (China Daily)
Updated: 2008-11-29 11:39

The price of gold will likely hit $1,000 per ounce next year, on speculation that international capital will flow to bullion markets, say pundits. Gold may become a safe haven for investors concerned about the credit crunch.

Gold will likely regain the momentum it had earlier this year, when international prices reached a record high of $1,002 per ounce in March in view of imminent inflation, said a World Gold Council investment manager. The high prices tapered off in July, as the global economic downturn loomed, eventually bottoming out below $750 per ounce.

"Many countries are still under the threat of inflation, creating a strong demand for gold to hedge against a material hike," said Natalie Dempster, a World Gold Council investment manager.

The financial crisis is making central banks in many countries unwilling to lend gold reserves, said UBS. The banks predict the credit squeeze will boost gold prices in the near future.

Demand for gold in developing countries such as China and India will buoy its price, said Convoy Asset Management director Ernest Chan.

"Forget investment purposes. Gold has an emotional significance to Chinese and Indians and gold ornaments are very common wedding and birthday gifts," said Chan.

But it may be too early to say gold prices will rebound, given the European central banks' interest rate cut, said Hong Kong Baptist University associate professor Billy Mak.

The European cut strengthens the dollar against the Euro and the pound, which may draw capital to the dollar instead of gold, he said.

Physical gold, gold futures and gold ETF (exchange trade fund) are the three most common forms of gold investment. Pundits advised investors to assess their risk tolerances for each of the forms before purchasing.

Physical gold is not a 'popular' tool for short-term speculation because it's inconvenient to store and offers no interest payment, said Mak.

Gold futures have higher leverage, but losses can be greater than investors' initial capital and there are exchange fees and commissions added to the trading cost.

"Investors (in gold futures) should be able to bear high risk and maintain a strong cash position," said Chan.

The first gold ETF SPDR debuted in the Hong Kong market on July 31. A share of the trust is set at the value of a tenth of an ounce of gold. The minimum subscription size is 10 shares (one ounce).

"ETF provides a convenient platform for gold trading because its operation is as easy as equities and it's very liquid. Also it's highly correlated with the underlying movement in spot," said Mak.

But ETF's drawback is that trading is not round-the-clock, making it vulnerable to large gap openings.