Financial Crisis Gives Investors More Reasons to Love Gold

The current global financial crisis is giving financial investors more reasons to love gold. Many investors are betting that inflation is going to jump as many countries cut their interest rates and essentially devaluing their currencies.

Published: Tuesday, 6 Dec 2011 | 3:22 PM ET
By: John Melloy

The global financial crisis is giving investors more reasons to love gold.

US investors—both retail and professionals—poured $3.6 billion into gold exchange-traded funds funds last month, quadruple the $813 million in October, according to numbers crunched by research firm Birinyi Associates.

It also was double the $1.7 billion placed in the second biggest ETF category by inflows, investment grade corporate bonds.

Investors are betting that inflation could heat up as many countries cut interest rates—essentially devaluing their currencies—and Europe gets set to inflate its way out of its credit crisis.

“It is going to be a go-to asset once everyone digests that if Europe is to be saved, the ECB will have to directly or indirectly print money and the inflation trade will be all on once again,” said Michael Block of Phoenix Partners Group. “I would be buying gold opportunistically.”

But gold has become more than just an inflation hedge or a safe haven from the world's woes. It's now its own asset class—and one that has outperformed stocks over the past decade.

The SPDR Gold Trust ETF [GLD 169.10], which has seen its market value balloon to $73 billion, is now the second-largest ETF behind only the SPDR S&P 500 [SPY 126.4211], according to Birinyi data.

And while the SPDR Gold Trust is up more than 20 percent this year, the S&P 500 ETF is little changed. Over the past ten years, the gold SPDR has soared 300 percent, while the SPDR S&P 500 is—again—little changed.

"It is one of the few assets over 2011 that has shown less than 80 percent correlation to financial assets like stocks," said Nicholas Colas, ConvergEx Group chief market strategist. "So it has provided better diversification than most asset classes."

And the betting is that its value will only keep increasing as countries struggle to reflate their economies and resolve their debt problems.

The European Central Bank is expected to cut interest rates Thursday. But all eyes are on a summit of European Union leaders Friday, where economists are hoping for a grand plan to be announced that will ring fence the crisis through an expanded buying program of troubled debt and in addition, some sort of fiscal accountability throughout the union.

“People love gold [GCCV1 1738.60] because it is the belief, and maybe rightfully so, that the only means to solve the global financial situation is to print money,” said Brian Stutland of Stutland Equities.

This problem is bigger than just Europe and that’s what has U.S. investors flooding into gold. The major central banks are all in an easing mode now. Australia cut rates Tuesday and China lowered the reserve ratio charged to banks earlier this week. And next week, our own Federal Reserve at its open committee meeting is likely to repeat its pledge for low rates “at least through mid-2013.”

“Investors like gold because global currencies have been devalued on an absolute basis,” said Philip Pearlman, investor and executive editor of “They like it more because it has traded higher, thus rewarding investors, for 10 years running.”

To be sure, gold is down this week. Even with nervous investors awaiting a solution from the two key Europe meetings, the metal—and ETFs tied to it—are lower. But Phoenix Partners’ Block sees a reason for this move that may not be readily apparent to the typical gold investor.

“Large institutions are raising cash (by selling gold) for other purposes, “ remarked Block. “Like, oh, I don’t know, bailing out Italy? At the end of that, you are going to want to own a lot of gold.”

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