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January 27th, 2009

Gold Standard of Investing

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Not many investments finished 2008 in the black. Financial fears caused many investors to make a flight to quality. For years gold has been, well, the gold standard for safe investing. Gold futures jumped up 1.5% yesterday, ending at $908.80 an ounce, the highest closing amount since September 22, 2008.  By last year’s end, the price of an ounce of gold had posted a gain of nearly 4.3%. As economic fears continue to haunt the market, will gold be another “go to” for investors in 2009?

The case for gold is this: The government is pumping trillions of dollars into bailouts and stimulus plans, a purposefully inflationary policy aimed at reversing current deflationary pressures. If inflation results, or if the dollar weakens as the supply of dollars necessarily increases under the stimulus plans, gold is a likely winner because it hedges against inflation and fiat currencies.

The opposing view: “The inflation argument hasn’t been seen yet in government data, and once the economy catches gear, the [Federal Reserve] will pull the money back out of the economy,” negating any inflationary pressures, says Tom Pawlicki, a precious-metals analyst at MF Global, who says he’s “not friendly on gold.”

Gold’s popularity among investors over the past two years correlates directly with a downtrodden economy, and the need to park their money in a safe environment. Early indications in 2009 may be pointing toward a shift in investor sentiment, not only in the U.S., but around the globe:

“Concerns about widening losses in financial institutions enhanced the value of gold as a safe-haven,” Shuji Sugata, a research manager at Mitsubishi Corp., Futures & Securities Ltd., said today by phone. “Investment demand for gold is rising.”

But what makes gold even more appealing than other safe-haven investments like Treasuries during tough economic times? According to goldmoney.com:

Since the beginning of 2002, US dollars held in 3-month US Treasury Bills have yielded less than 3% per year (Source: Global Financial Data). Considering that the inflation rate over this same period of time has averaged more than 3% annually (Source: US CPI), the cash accumulated had less buying power in January 2007 than it did five years earlier.

Over this same period of time, the gold price in US dollars increased by 130% – an average gain of 26% per year.

Expect “flights to quality” to continue, since the only economic assurance we have right now is that none exists. Massive job cuts coupled with the fears that a stimulus package could speed global inflation has turned investor sights back to the most popular commodity with a history seemingly worth its weight in gold.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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