20 November 2009
	Gold as a hedge remains alluring

Two months ago, the International Monetary Fund approved sales of 400 t of gold, less than 15% of its gold reserves. Its purpose was to place its finances on a sound footing and ensure it would have sufficient lending capacity. It said it would sell the gold in a phased manner, at market prices, and aim to avoid disrupting the market. That news has done little to curb bullion's upward trend. Over 12 months the gold price has risen by 54%, outperforming many equity markets over this period. In recent weeks it has reached record highs above US$1 100/oz, despite more signs of recovery in the world economy. The prospect of large sales by the IMF is not the only negative. Jewellery demand is being depressed by high prices and weak consumer spending. Investors who fear deflation rather than inflation may also be less inclined to hold gold. But demand is increasing as well. China has greatly increased its gold reserves. Earlier this month India said it had bought 200 t of gold from the IMF. This week Mauritius announced a 2 t purchase, also from the IMF. Central banks are showing greater interest in gold because they want to diversify their foreign exchange reserves. These are often held in dollar-denominated assets and the dollar has been persistently weak this year. World production of newly mined gold is also falling. SA's output is declining steadily because of falling grades, high costs and rand strength. Its production fell in the third quarter by an annualised 2,9%. The long-term decline is much more striking. Forecasts of the bullion price are usually dangerous, but recent trends underline the allure the metal still holds as a hedge against inflation, weakness in paper currencies and uncertainty. And there is still great uncertainty in the world.