Start building the bunker

September 9, 2009

They keep telling us that the recession is over so maybe now’s the time to start worrying about inflation. That’s the view many wealthy investors are already taking, reasoning that a little bit of the yellow shiny stuff will provide some comfort as we start piling our cash into wheelbarrows to do the weekly groceries shop.

It is gold exchange traded commodities (ETCs) that have seen the biggest investor inflows this year so perhaps it’s not surprising that the gold price broke through $1,000 an ounce this week.

“Investors are concerned about sovereign risk, quantitative easing, government deficits and the outlook for the US dollar,” said Nicholas Brooks, head of research and investment strategy at ETF Securities, at a Dow Jones Indexes commodities briefing on Tuesday. “They are using gold as an insurance policy.”

Physically-backed gold ETC holdings are now 8 million ounces, up 33 percent versus end-2008 levels, he said. Gold inflows have been relatively steady, even when the price has corrected, with the biggest flows coming not when Lehman went bust, but when the scale of US quantitative easing and the fiscal cost of the financial bailout became apparent. This supports the view that gold is being used as a hedge against sovereign and inflation risk, Brooks said.

Billionaire hedge fund manager John Paulson has been building up a large exposure to gold this year, seemingly as part of an inflation hedge.

John Reade, head of markets strategy at UBS Investment Bank, also confirmed that UBS clients were showing an interest in assets that would provide inflation protection. “You don’t need high inflation for gold to perform well – you only need an increase in the number of people who expect inflation to rise.”

Over the last 30 years the returns from gold have been reasonable but not great, with high volatility, he said. But in an environment where the US dollar is weakening, the Fed Funds rate is rising and inflation is rising, gold can be expected to perform, with returns of over 40 percent per annum if CPI increases. This suggests that an investor’s tactical allocation to gold should rise in the coming months, Reade said.

He forecast an average gold price of $1,050 an ounce for 2010, pointing out that gold remains very lightly owned by most institutional investors. This was not consistent with inflationary or US dollar weakness scenarios, he said.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

I believe there are excellent opportunities in the junior mining sector that offers investors huge leverage to the price of gold. There are “steals” out there in the precious metals sector.

Posted by | Report as abusive

Just another bubble. If you bought gold in 1980 you only would have been able to make a profit at around about 2006.

Posted by Chris du Preez | Report as abusive

I believe junior miners are still incredibly cheap…take a look at my blog for some ideas.

Posted by | Report as abusive

[…] that physical holdings of gold in exchange-traded securities jumped 33% year to date, this cycle is expanding at an alarming […]

Posted by Gold Bugs Are The Real Estate Punters Of Yesteryear | Report as abusive

Agree with Chris du Preez.
Its just another bubble. All the big boys got into gold in 2000 and they are going to make money.

Posted by PwlM | Report as abusive

Well I suspect some people will want to put money in gold. If there is a big push to inflation then real estate should be snapped up a bargain prices and unloaded at the top. Gold is a steady safe investment and I believe it should be kept by those who desire to keep their money in this form. I do not think we will see runaway inflation, but I do think we will see a substantial increase in real estate prices.

Posted by f belz | Report as abusive