PRECIOUS metals are considered alternative investments for investors to preserve wealth as they rush for safety amidst the decline of financial asset values. Precious metal resources are rare and finite therefore, have high investment value. The metals include gold, silver, platinum, palladium and rhodium.
Gold is the most popular investment of all the precious metals due to its characteristics and the roles it played throughout human history. Gold is the oldest universal currency and has been used as a medium of exchange for thousands of years. Over the centuries, gold is appreciated for its beauty, rarity and near indestructibility. This article will focus on precious metals as well as gold in particular.
Benefits of investing inprecious metals and gold
There are many reasons for investors to invest in precious metals and particularly gold. Some of the key advantages are as follows:
Investments in precious metals are not closely correlated to stocks and bonds.
For instance, gold helps in portfolio diversification because it is generally lowly correlated with other assets such as stocks and bonds.
"Asset diversification through assets that have low or negative correlations is essential in the wealth management process. Investors diversify to reduce risk in the portfolio and to increase returns, just like the saying 'don't put all your eggs into one basket'. To diversify, investors may put their money in several types of investments to minimise the impact of one type of asset on the overall performance of the total portfolio," said Datin Maznah Mahbob, chief executive officer, Funds Management Division of AmInvestment Bank Group.
The chart shows that the gains in gold price were higher than those of the S&P 500 Index and the MSCI World Index in the past four years. During the global financial meltdown last year, gold managed to hold its value and recorded a positive gain of 3 per cent as compared to -42 per cent and -38 per cent for the MSCI World Index and S&P 500 Index respectively. The same could be seen when the stock market crash occurred in 2002 in the US and Europe.
* Potential price rise for precious metals due to an imbalance supply-demand relationship
"There is an imbalance of supply and demand for precious metals including gold and platinum. The increasing demand for gold, particularly in Asia, could not be matched by gold supply," Maznah said.
In 2008, global gold demand of 3,804 tonnes exceeded the supply of only 3,512 tonnes. Total gold mine supply accounted for 2,064 tonnes or 59 per cent of the total (Source: World Gold Council, August 2009). There has not been much increase in gold supply due to expensive production cost for the metal and the limit in gold sales by central banks in recent years.
Global gold jewellery demand was recorded at 2,186 tonnes or 58 per cent of the total demand last year (Source: World Gold Council, August 2009).
Over the past ten years, gold demand for jewellery, coins and medals made up around 83 per cent of global demand (Source: Societe Generale Cross Asset Research, August 2009).
There is also mismatch in demand and supply for platinum. In 2008, global platinum demand was 6.35 million ounces as compared to platinum supply of 5.97 million ounces, based on Johnson Matthey's "Platinum 2009" market review. The supply dropped by 9.5 per cent primarily due to production problems in South Africa including interruptions to electricity supply, smelter shutdowns and bad weather.
Going forward, the price of precious metals is expected to increase since low supply could not accommodate the increasing demand.
* Gold for long-term inflation protection
Inflation is an increase in the general level of prices of goods and services in an economy over a period of time. It decreases the amount of goods or services that consumers can buy. Inflation reduces purchasing power of consumers due to currencies losing their value.
"Gold could maintain its long-term value through the market cycles. Therefore gold is preferred as a hedge against inflation as it could keep up with the inflation rate," Maznah said.
For example, the price of a limousine is equivalent to about 5 kilograms of gold today. Comparatively, the same amount of gold was required for a limousine 50 years ago although the price of the luxury vehicle has increased many times.
* Gold is a good hedge for US dollar
Gold is considered a good protection against depreciation in currency as the value of gold does not depreciate.
"Gold is an effective hedge against fluctuations in the US dollar, which is the world's main trading currency. There is a negative correlation between gold price and the US dollar. This relationship is consistent over time and across exchange rates," Maznah added.
* Gold is a store of value
Money or currencies may lose their function as a store of value during inflation. On the contrary, gold, silver, real estate and other stores of value have shown their consistency over time. Demand for gold increases during political, social or economic distress because the value of gold retains in most situations.
Gold is the only currency in the world that is not subject to competitive devaluation, debasement (the practice of lowering the value of currency) or the excessive promises of overspent governments. It is stable and does not rely on obligation for repayment by any government or corporation.
Conclusion
Investors have the options of making direct or indirect investments in precious metals to enjoy the many benefits of this asset class and to ride out the storms of a volatile market. Precious metals generally perform well during periods of rising inflation, heightened financial market volatility and geopolitical event risk.
Thus, this asset class remains an investment tool of choice for wealth preservation and portfolio diversification.
*This article is contributed by the Funds Management Division of AmInvestment Bank Group.
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