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Gold's Performance as a Safe Haven Asset

Commodities / Gold & Silver Mar 28, 2008 - 11:15 AM GMT

By: Mark_OByrne

Commodities Best Financial Markets Analysis ArticleGold has traded sideways to slightly down in Asian and early trading in London this morning. Gold was down 30 cents to $948.80 per ounce in trading in New York yesterday while silver was up 17 cents to $18.49 per ounce. The London AM Gold Fix at 1030 GMT this morning was at $944.50, £473.05  €598.28 (from $948.25,  £470.60 and €600.31 yesterday). Thus, while gold was slightly down in euros and dollars it was stronger in pounds with the pound weakening on the deteriorating UK outlook (more below).


Gold is in a range between $905 and $955 and may look to consolidate at these levels. The fact that it continues to probe the higher end of this range suggests that the path of least resistance is to the upside. This is especially the case due to the litany of bad economic news from both sides of the Atlantic. The economic data in the U.S. yesterday was neutral at best with weekly jobless claims uninspiring and Q4 GDP falling to a sluggish 0.6%. The final GDP report also contained the first estimates of corporate profits for the fourth quarter. They fell 3.3%, down for the second straight quarter.
28-Mar-08 Last 1 Month YTD 1 Year 5 Year
Gold $     
944.37
-2.55%
13.32%
42.00%
184.79%
Silver      
18.33
-7.23%
24.10%
37.51%
313.77%
Oil     
107.52
4.79%
8.42%
256.49%
FTSE      
5,725
-4.03%
-11.03%
-8.65%
53.95%
    
12,820
-7.93%
-16.24%
-25.69%
54.83%
S&P 500
-3.06%
-9.71%
-6.45%
53.53%
ISEQ      
6,229
-4.45%
-32.80%
56.58%
EUR/USD     
1.5798
3.98%
8.31%
18.70%
46.52%
© 2008 GoldandSilverInvestments.com


Today, the Commerce Department releases its February report on consumer incomes and spending, which should help gauge how well or ill the economy is faring in the current quarter. Even more important will likely be the University of Michigan Survey of consumer sentiment for March. If it shows further deterioration then the dollar will again come under pressure and gold will likely show strength.

The U.S. consumer accounts for 70% of the U.S. economy and consumer spending is under serious pressure from a weakening labor market, ongoing carnage in the housing industry, and massively indebted household balance sheets.

Similar issues are confronting the UK economy. The UK housing market continues to fall and consumer confidence has fallen to its lowest level in 15 years. The embattled Lehman Brothers have issued a report on the UK economy entitled the ‘Downward Spiral' in which they estimate the chances of a UK recession at being 35%. We have said that a consumer and property driven UK recession was inevitable since 2005. Lehman Brothers say the prospects for the UK economy look particularly bleak for the next two years - and perhaps beyond.

UK credit markets continue to show signs of seizing up with the LIBOR rate above 6% and continuing to reach new record highs. The FT reports that the credit crunch yesterday forced three of the UK's biggest lenders to tighten up the supply of home loans and charge more for them in moves that are likely to put further pressure on the property market. Millions of home loan borrowers now face higher interest rates as banks pass on higher wholesale funding costs as conditions worsen in money markets.


A recession has clearly arrived in the US (and will likely be soon reach the UK)– the question is how deep the recession becomes and whether a recession leads to a 1990's style Japanese deflationary recession, a 1930's style deflationary crash and depression or a 1920's style German hyperinflation or most likely a severe 1970's style stagflation with a combination of sharply falling asset prices and economic growth with competitive currency devaluations and severe inflation in the price of essential goods such as food and energy.


Gold's Performance as a Safe Haven Asset

An example of gold's historic role as a safe haven asset is seen in the following data. The industry performance of Physical Gold Versus the S&P 500 during eleven stock market declines of 15% or more in the Post-War period (since 1946).

Correction Date
S & P 500
Physical Gold
Gold Mining Shares
May 46 - May 47
-23
0
-28
June 48 - June 49
-17
0
+3
-15
0
-18
Dec 61 - June 62
-22
0
-3
Feb 66 - Oct 66
-17
0
-10
Nov 68 - May 70
-28
+4.11
-35
Jan 73 - Oct 74
-41
+142.87
+144
Sept 76 - Mar 78
-16
+60.72
+43
Nov 80 - Aug 82
-19
-34.58
-60
Aug 87 - Dec 87
-27
+7.90
-22
July 90 - Oct 90
-15
+2.54
-8
Source: Sam Stovall, Chief Investment Strategist at Standard & Poor's, featured in 'The Bear Book - Survive and Profit in Ferocious Markets' by John Rothchild.

Note: Gold price was "fixed" and the US dollar was backed by gold during the first few episodes, hence physical gold was cash and registered no gains and no losses.

Gold and Silver Investments Ltd - www.goldassets.co.uk


Some exposure to gold should be included in all diversified portfolios. In the same way that every major Central Bank in the world continues to maintain huge reserves of gold bullion in order to help prevent systemic or monetary crisis, so too should private investors and institutions invest, save and own gold. A good rule of thumb would be a minimum allocation of around 10% to gold and related gold-investments. The wise old Wall Street saying - "Put ten percent of your money in gold and hope it doesn't work", is particularly applicable in today's fast changing and increasingly uncertain macroeconomic, financial and geopolitical world.

Support and Resistance
Gold's support is now between $900 and $906 and below that strong support is at previous resistance at the 1980 record nominal high of $860. Resistance is at the recent new record nominal high of $1030.80 and $1000.

Silver

Silver is trading at $18.35/18.42 at 1100GMT.

PGMs

Platinum is trading at $2030/2040 (1100 GMT).
Palladium is trading at $446/452 per ounce (1100GMT). 

By Mark O'Byrne, Executive Director

Gold Investments
63 Fitzwilliam Square
Dublin 2
Ireland
Ph +353 1 6325010
Fax  +353 1 6619664
Email info@gold.ie
Web www.gold.ie
Gold Investments
Tower 42, Level 7
25 Old Broad Street
London
EC2N 1HN
United Kingdom
Ph +44 (0) 207 0604653
Fax +44 (0) 207 8770708
Email info@www.goldassets.co.uk
Web www.goldassets.co.uk

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

Mission Statement
Gold and Silver Investments Limited hope to inform our clientele of important financial and economic developments and thus help our clientele and prospective clientele understand our rapidly changing global economy and the implications for their livelihoods and wealth.
We focus on the medium and long term global macroeconomic trends and how they pertain to the precious metal markets and our clienteles savings, investments and livelihoods. We emphasise prudence, safety and security as they are of paramount importance in the preservation of wealth.

Financial Regulation: Gold & Silver Investments Limited trading as Gold Investments is regulated by the Financial Regulator as a multi-agency intermediary. Our Financial Regulator Reference Number is 39656. Gold Investments is registered in the Companies Registration Office under Company number 377252 . Registered for VAT under number 6397252A . Codes of Conduct are imposed by the Financial Regulator and can be accessed at www.financialregulator.ie or from the Financial Regulator at PO Box 9138, College Green, Dublin 2, Ireland. Property, Commodities and Precious Metals are not regulated by the Financial Regulator

Disclaimer: The information in this document has been obtained from sources, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken. Investors should note the following: The value of investments may fall or rise against investors' interests. Income levels from investments may fluctuate. Changes in exchange rates may have an adverse effect on the value of, or income from, investments denominated in foreign currencies. Past experience is not necessarily a guide to future performance.

All the opinions expressed herein are solely those of Gold & Silver Investments Limited and not those of the Perth Mint. They do not reflect the views of the Perth Mint and the Perth Mint accepts no legal liability or responsibility for any claims made or opinions expressed herein.

Mark O'Byrne Archive

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