Posted On Thursday, Jan 07, 2010
Well, there have been many who recently concluded that the `bull run` of gold is drawing to an end. They obviously drew their conclusion from the correction mode that the price of gold has moved in to, after setting a record high at $1226 per ounce. There have also been some who were of the opinion that gold was in a bubble which has now popped and hence the price of gold should decline further.
Yes, we beg to differ, with a fundamental question: How can an asset that is so under owned be a bubble?
Most investment portfolios still don`t own any gold. And those who do own gold don’t seem to have it in adequate proportions.
Chart 1: Gold remains an under owned asset
Source: Barrick Gold Corporation
The scarcity value of gold is explained in the table above, showing gold ETFs and gold equities amounting to $0.4 trillion, which is miniscule in comparison to the total managed assets or to the global financial assets.
When compared, gold ETFs and equities amount to 0.7% of total managed assets and 0.3% of total global financial assets.
The year gone by did witness some record flows, but gold still constitutes a minority investment. The value of all the gold that has ever been mined approximately amounts to $6 trillion which is also very small when compared to $123 trillion of financial assets.
We do not think that gold is any close to being a bubble. Rather, the small size of investment in gold demonstrates the potential for a shift of money into gold. If gold were to become a more mainstream asset, if a small percent of the cash held in money market funds and savings were re-directed towards gold, then the impact on the price of gold would be profound.
A correction of 10-15% isn’t popping of a bubble. Long term bull runs often do have corrective and consolidation phases which are healthy signs of the bull run being intact. Also, this correction in gold price has not come as a surprise. We had written (in our monthly outlook) about these speculative forces that are capable of bringing in a correction in the price of gold. We think this is a healthy sign and beneficial for investors to add more gold to their kitty.
Policymakers still reserve monopoly over their printing presses and keep running them at full capacity to dole out money at any and all problems faced by them. Ever increasing money supply will always make gold the preferred choice for citizens as a store of value.
We recommend a 15-20% allocation of one’s portfolio in gold. If you under own gold, then treat these declines as an opportunity to increase your holdings of gold. Or a more sensible way is to keep allocating to gold over the next 36 months and reach the optimum level.
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The views expressed in this article are the personal views of the Fund Manager of Quantum Gold Fund. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide/investment advice for the readers. This article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.
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