Spotlight on Gold

Contrary to common belief gold is not a very good inflation hedge. Nonetheless demand continues to stay strong, although you may argue that gold prices are already on a very high level. In fact, we believe there are plenty of factors supporting the case for even further upside potential.

First of all, the uncertain macro environment and the devaluation of fiat money have contributed to the increased demand for gold throughout the whole year. However, not only do private investors buy gold but also do we see a strong demand from the official sector. Recent data shows that for example Russia has increased its reserves by 82 tonnes so far in 2011 (as per end of October), while Bolivia purchased 14 tonnes and Kazakhstan over 6 tonnes1. And all these countries expressed their intention to further increase their reserves in the coming months. Further, the uncertain economic environment across the world has also driven demand for gold ETFs that are physically backed. Since interest rates in the major markets are kept very low (and there is no sign of this changing anytime soon) opportunity costs are likewise negligible.
 
What happens though as soon as inflation sets in? This means that interest rates will start rising accordingly and since gold does not pay any dividends (quite the contrary, you can have significant costs associated with holding gold) it will not offer investors a true protection from devaluation of their assets. Gold is probably one of the best investments just before inflation hits, but as soon as inflation sets in one should consider other commodities (like agricultures or fossil fuels) or other asset classes such as managed futures or company stocks.
 

Ø Uncertain macroeconomic environment

The situation around the European debt crisis, the troubled American housing market as well as a slow-down in the emerging markets drives people into buying secure assets such as gold. The devaluation of fiat money fuels people’s fears and thus pushes demand for precious metals higher. This does not mean though that gold is a good inflation hedge.


Ø Valuation gap between mining stocks and gold bullion

The price for bullion has more than doubled since 2008 while stocks of gold mining companies have risen by merely 30 percent. This means that there is a good chance that we’ll see a massive rally in mining stocks as their margins as well as their earnings per share are as high as ever.


Ø Inflation – what to do?

Contrary to common belief, investments in gold do not offer the safe haven people seek in times of high inflation. We believe rising gold prices are merely an early indicator for a loss of confidence in the government and banking system. People feel better with a gold bar in their safe, however that does not mean that they are on the safe side when inflation arises. If high inflation hits one is better off with agricultures, fossil fuels or other asset classes such as managed futures or well positioned company stocks.
 
 
About Man

Man is a world-leading alternative investment management business. It has expertise in a wide range of liquid investment styles including managed futures, equity, credit and convertibles, emerging markets, global macro and multi-manager, combined with powerful product structuring, distribution and client service capabilities. As at 30 September 2011, Man managed $64.5 billion. The original business was founded in 1783. Today, Man Group plc is listed on the London Stock Exchange and is a member of the FTSE 100 Index, with a market capitalisation of more than £2.5 billion. 2

Man is a member of the Dow Jones Sustainability World Index and the FTSE4Good Index. Man also supports many awards, charities and initiatives around the world, including sponsorship of the Man Booker literary prizes. Further information can be found at www.mangroupplc.com