Think of gold as cheap insurance

published 22 August 2008

Gold bugs have been "hit in the face with a frying pan", says Justice Litle on www.Kitco.com. The yellow metal has slumped by over a fifth since mid-July and hit a nine-month low under $800 an ounce. The rebound in the dollar has dented sentiment towards all commodities, while inflation worries have been eclipsed by the poor growth outlook amid easing oil prices. Falling demand for gold jewellery due to higher prices has also prompted speculators to head for the exit.

Nevertheless, gold still looks a solid bet. Supply remains tight and jewellery demand is recovering in India, the world's biggest consumer, now that gold is cheaper, says Lawrence Williams on www.Mineweb.co.za. As far as investment demand is concerned, there seems plenty of scope for future rises. Gold is the ultimate safe haven and the oldest form of money, so it should shine, given the nasty array of risks to the world economy and its major currencies.

One danger is that the world economy could end up in a deflationary Japanese-style slump that prompts central banks to bail out banking systems and economies with huge cash injections, in turn stoking inflation. Ambrose Evans-Pritchard on www.Telegraph.co.uk highlights the risk of a "race to the bottom" between the dollar and the euro as both seek to overcome a slump with weak currencies. With the future unclear and likely to be unpleasant, stocking up on gold is sensible. As Tim Price of PFP Wealth Management says, "at a time when both fiat money and the global banking system have never looked more precarious", gold at current levels is cheap portfolio insurance.