THE PAST TWO YEARS have been the most tumultuous in financial markets for many decades. Four mega financial institutions in the US announced bankruptcy and that led to the collapse of bank stocks across the world. No wonder investors fled for traditional safe-haven assets like gold. Even China and India were net buyers of gold in 2009 after decades of selling.
The demand for gold exchange-traded funds (ETFs) rose 26.9 per cent to 321 tonnes in 2008 and another 92.2 per cent in 2009 to 617 tonnes. The world’s biggest gold ETF, SPDR Gold Shares, increased its gold holdings 66 per cent to 1,295 tonnes from December 2008. In India, the corpus under gold ETFs soared from Rs 477.65 crore in 2008 to Rs 2,305.62 crore as of August 2010. Gold prices increased by 27 per cent in 2009 and another 19 per cent in 2010 so far, to hit an all-time high of $1,282 an ounce, marking the 10th consecutive annual increase. If the past two years have taught equity investors anything, it is the importance of structuring portfolios with assets that will help protect wealth should such risks materialise.
The price of gold also rose during 2008 amidst the worst financial crisis since the Great Depression, fulfilling its role as a hedge against unforeseen events and financial distress. Other commonly traded commodities and diversified commodity baskets fell between 6 per cent and 63 per cent; the price of oil, which is often erroneously equated to investment in gold, fell more than 50 per cent during 2008.
Gold’s bull run started in April 2001, when the price slowly lifted from its earlier low of $255.95, just higher than the 20-year low of $252.85 set on August 25, 1999. Between the end of 2001 and 2009, gold prices rose from $276.50 to $1087.50, a cumulative rise of 293 per cent or an average compounded annual return of 18.7 per cent.
