Why Gold

Gold is often used to diversify investment portfolios away from equities, bonds and property. It allows investors to reduce the effects of fluctuations in other asset classes, along with being relatively stable.

Gold is also used as a hedge against inflation. Its actual purchsing power has always remained strong compared with currencies. Examples can be seen after the great depression in 1929, when the purchasing power of Gold rose 17 fold (BullionVault, 2006).

Traders turn to gold when there is weakness in the dollar. As the dollar has declined over the past 5 years, the gold price has gone up. Many counties around the world hold foreign currency reserves in dollars which they have seen decline over the years, this is while watching a commodity bull run. Countries such as China with huge dollar reserves are now looking to diversifty, this inturn adds greater for gold.

When markets become uncertain, there is often a flight to gold by professional traders and pension funds as it is relatively stable. The current credit crisis has seen gold prices increase when all other asset classes are falling. Allocated gold is void from credit defaults, one reason why there has been a huge shift to gold over the last year.

From the highs of the 80z, Gold fell dramatically during a commodities bear market which lasted for nearly 20 years. For the gold price to be above its 80s high (including inflation), it would need to be over $2000/OZ. This indicates there is a long way to go for gold before it can really be seen as bubble, even at the previous high of $1000/Oz.

There is also hudge increases in demand from emerging markets. China and Russia offer huge markets by investors and consumers. India is also seen as a rapidly expanding market for Gold products, and currently seeing a surge of gold product sales as gold prices have come down slightly, coinciding with festival season.

The supply of gold has also kept prices strong. Supply has remained stagnet, while few new mines have been opened over the past 10 years. This restriction gives gold its investment potential as there is little industrial use for the metal.