WGC study shows gold outperforms other traditional inflation hedges

The Word Gold Council has released its latest Gold Investment Digest and a report on gold as an inflation hedge.

LONDON - 

The World Gold Council, in its regular quarterly appraisal of the gold market, noted that the yellow metal increased modestly in the second quarter, supported by, among other things, ongoing inflation fears. Traditionally an inflation hedge, gold was sought by investors who had growing concerns about central bank's exit strategies and the implications of a reversal in quantitative easing measu

On gold's inflation hedge credentials, Natalie Dempster, Head of Investment, North America, World Gold Council commented:

"Fears of future inflation drove investor interest as seen by the continued demand for the ETFs during the quarter. Traditionally, gold has been an effective inflation hedge, and as our recent study shows, also performs well during low to medium inflationary environments."

This recent study, which examined the relative performance of four traditional inflation hedges (gold, real estate, Treasury Inflation-Protected Securities (TIPS) and general commodities), found that in  two of   the  three historical scenarios, gold proved  more  effective  than  commodities,  real  estate  and  TIPS,  at  achieving  both the maximum  reward-risk portfolio and  the minimum-variance portfolio. The required  allocation  to  gold  in  the  portfolio mix  to  attain minimum  variance ranged from 4.0 to 6.3%, while the allocation required to achieve the maximum reward-risk ranged from 7.0 to 9.9%. A 6.9% allocation to gold also produced the highest reward-risk portfolio in the forecast scenario, while an allocation to TIPS produced the lowest variance portfolio. The analysis also found a strategic case for gold  in  the portfolio of  an  investor  that already holds TIPS,  thanks  to  the additional diversification benefits gold brings to a portfolio.

To see the full study click on: http://www.gold.org/deliver.php?file=/rs_archive/AssetAllocation_Inflation_July09.pdf - (free registration to WGC website required)

The WGC's latest Gold Investment Digest, just out, also pointed out that the gold price edged slightly higher in Q2 ‘09, ending the quarter at US$934.50/oz, on the London PM fix, compared with US$916.50/oz at the end of Q1 ‘09. The gold price fixed as high as US$981.75/oz on June 1 coinciding with the quarterly low in the dollar, which was pressurized, among other things, by growing questions about its future as the world's reserve currency.

While other asset classes such as oil, the commodity complex in general, and equities outperformed gold during the second quarter, on a year-over-year basis gold posted a small gain while the others suffered sharp declines.

Investors continued to increase their gold holdings via exchange traded funds in the second quarter, though at a much slower pace than the record amount of gold purchased via this channel in Q1 ‘09. Retail investment in coins and small bars also slowed in the second quarter, according to the anecdotal reports from dealers, while investors marginally increased their holding of gold futures.

More broadly, gold was seen as being supported  throughout the quarter by increasing signs that the worst of  the global recession might be behind us and a corresponding uptick in investors' fears about future inflation.

Gold  was also  supported  by  growing  concerns about Central Banks' exit strategies. ‘What if Central Banks leave interest rates too low for too long or pump too much money into  the economy?' ponders the WGC.  ‘If   they do, they  risk making  today's solution into tomorrow's problem: a sharp rise in inflation.  If   inflation  does  materialise,  then  traditional  inflation-hedges like gold, commodities, real estate and inflation-linked  bonds  are  likely  to  outperform  other mainstream financial assets.'

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