Gold has regained its status as a safe haven. With investors running from risky assets, gold is one area benefiting strongly. In fact analysts have been busy upgrading forecasts for gold prices so great news for some of Australia's gold miners.
Why a safe haven?
When sharemarkets fall, investors usually turn to fixed interest of cash to park their money. But even fixed interest can be risky and even cash can be devalued by inflation and currency movements. If foreign banks become concerned about holding US dollars, they usually go for gold.
Gold is a safe haven asset and with analysts upgrading forecasts for gold, this is going to be good news for gold miners. But gold stocks aren't the only way to invest in gold. You can also get exposure to gold prices through Exchange Traded Funds (ETF) through the SPDR Gold Trust which is traded just like shares. The trust issues securities which are backed by physical gold.
If you look at the chart for gold long term versus the chart for the sharemarket, you can see that they do not move together. Hence gold is used because it doesn't move in the same way of gold and so is used for diversification and to decrease risk in a portfolio.
In summary, gold is used in place of currency in times of risk, as a hedge against inflation, as a means for diversification and decreasing risk in a portfolio and really starts to shine when there is lots of fear in the market. Be careful because studies have shown that generally gold is not an effective means for profit after a large negative shock if held for more than 15 days after the shock. It can benefit in the short term.
Outlook for gold
We will most likely see the price of gold go up in 2009 with the medium to long term outlook for the US currency looking weak. Investors are likely to choose to invest in gold instead of a weak US dollar and that should support prices and see them move further upwards.
Some people have been so scared of the financial system that they are holding actual physical gold instead of trusting it to the financial markets. Current demand for gold coins has gone through the roof and as such is expected to benefit the gold miners.
Gold stocks can be widely divided into the large cap stocks and the smaller junior miners. The three largest gold stocks on the Australian sharemarket are in order: Newcrest Mining, Lihir Gold and Sino Gold
Lihir Gold would be my gold pick due to its pure leverage which means it can take full advantage of a rise in gold prices. Newcrest mining also is a quality gold company but with capital expenditure of $2 billion over the next 4 years, Lihir Gold is probably going to do better in the current environment.
Happy investing!
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