gold: the barbaric relic shines , page-3

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    Possibly, but then there is this from the same paper...

    THE SMART INVESTOR
    Tactics for a gold rush
    Feb 8
    Barrie Dunstan

    Gold has quickly become the hot investment area and, if smart investors think dotcom stocks and real estate can generate some frenzy, they haven't seen what gold can do. In view of gold's traditional role, investors may need to tread carefully as the gold rush accelerates because, allowing for the usual volatility, gold suddenly looks to be the flavour of the month, if not the year.

    There's more than just the threat of war in Iraq driving the market. Gold is rallying against most major currencies because many speculators are scared that the world's central bankers will be so keen to fight the threat of deflation that they will overdo the stimulation and debase the currencies. The mighty US dollar is already in a pronounced downtrend and, after dabbling in euros and some other currencies, the smarties of the world are now hedging into gold which is seen as a stable, long-term store of value.

    In other words, the speculators may be sniffing the start of a trend where, after two decades of disinflation, inflation is moving higher, says State Street Global Advisors strategist Harvinder Kalirai.

    Gold is re-emerging as an alternative asset at a time when investors are becoming disillusioned with the usual long-term investments such as shares and bonds. And, of course, in the background is the increasing din of the drums of war.

    The main story, though, is still the state of the US economy: the world needs the US economy firing. Share investors wouldn't mind if it was firing on all cylinders at full revs; bond investors would prefer the economy to revive without too much creation of paper money and a threat of inflation.

    The big and swift change in the US budget has confirmed market fears about war spending and rising deficits, and the Federal Reserve has told the markets it will do whatever it may take to head off deflation. If the US is prepared to run the printing press to create more dollars, is it any wonder that investors are getting nervous?

    The US dollar, seen as good as gold in the Gulf War, may turn out to be just another paper currency.

    So there's already a lot of concern and debate among serious investors about the dollar and the state of the US economy. The worry for ordinary investors is that it has brought out the gold bugs and those whose enthusiasm for gold also involves a deep pessimism about the rest of the world.

    In short, investors will have to pick their way through some more colourful and bearish commentaries - such as one pro-gold commentator whose January vision includes the Dow Jones Industrial Average at 4500 points (from around 8000 now), most pension funds broke, the onset of a depression this year and gold at $US850 an ounce (more than double today's price).

    Moreover, we might not need such a dire state of affairs to sustain the renewed investment interest in gold.

    So, yes, the US economy is not in good shape, and the greenback is under pressure. One US currency operator and hedger, Bridgewater Associates, suggested this week that the $US correction was in its early phase and the currency could depreciate by another 20 to 30 per cent.

    But whether investors ought to prepare for a more apocalyptic vision and put everything into physical gold is a different issue altogether.

    Indeed, allocating part of any portfolio to gold involves hard decisions on what is the best approach.

    Some gold enthusiasts won't hear of anything less than holding gold coins or gold bars - which is inconvenient, risky and doesn't produce any income.

    Futures contracts are more short-term but can be expensive - especially for investors who dive into a pond populated by speculators.

    Holding gold shares, meanwhile, at least provides daily liquidity. The trouble is that holding gold shares introduces all sorts of other factors, such as operational risk and the chance that a company might not be run as well as expected.

    Investors in gold shares need to know whether their intended gold miners are hedging future production.

    This was probably sensible when prices were stagnant; but with rising prices, miners with unhedged production will reap higher profits - though they also remain more exposed to any setbacks in the gold market.

 
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