A Golden Strategy

Robert Hsu, February 27, 2008

The recent credit crunch has highlighted one of gold's major draws -- its ability to be a safe haven for cash. Lately, as the market has become increasingly volatile, investors have turned to gold and made it one of the strongest asset classes right now. According to the World Gold Council, international gold demand surged 20% to a record $79.2 billion in 2007 from $66.1 billion a year ago. Bullion's safe-haven and hedging characteristics are especially attractive to investors during the current period of heightened geopolitical and financial risks, rising inflation pressures and a weak U.S. dollar.

Demand for gold has been particularly strong in major gold jewelry buying countries, like India, China, the Middle East, Turkey and Russia. China has now overtaken the U.S. as the second largest volume retail market for gold jewelry after India. China's total consumer demand for gold reached 326 tons in 2007, 26% above 2006 levels. Just like China, Turkey also showed record overall demand for gold in 2007, up 14% from 2006. Strong growth continued in Russia with jewelry demand rising 11% to set a new record. Russian demand for gold in the fourth quarter of 2007 increased nearly 25%, making Russia the fastest-growing country for the quarter.

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However, gold supply remained tight throughout 2007, falling back 3% in tonnage terms. I believe gold is well-positioned to continue its bullish run. The price of gold hit a new record above $960 this week, up 15% year-to-date. But even so, it still has a long way to go before hitting the inflationary-adjusted high of around $2,200 per ounce reached in January 1980. I wouldn't be surprised to see gold hit $1,000 per ounce (or even higher!) in the coming weeks or months.

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