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Why you should diversify into alternatives?

The key to balance is to diversify

Guest blogger – Richard Broughton

Everyone knows you should diversify your investments. Academic studies show that this reduces investment risk and smoothes-out volatility. Indeed, the benefits of diversification are felt most during recessions and bear markets.
But too few investors diversify away from security-based investments such as equities, bonds and hedge funds etc which are all, to some degree, related to each other.
True diversification can only be achieved by having a mix of assets that are not correlated. Alternative assets such as fine wines, rare coins, stamps and gold are perfect counterweights. Studies* have shown that most categories of portable alternative assets (with the exception of art) have low volatility and little correlation to equity markets; in many cases negative correlations with Bond markets.
There is an alternative view of ‘why diversify’ and that is the more you diversify into other assets the greater chance you have of one asset disproportionately outperforming the other assets … but more on this next time …
* Campbell, Koedijk & De Roon (2006)
If you fancy investing or looking at this market please contact Mallory Scott Alternatives on 020 7016 6750 or 07976 764129.
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Industry News

Gold Demand Trends – New World Gold Council Report

New Gold Demand Trends and updated Supply and Demand Statistics

GDT AND DEMAND STATISTICS FOR Q3 2010

We published the latest issue of Gold Demand Trends for Q3 2010 today, which suggests demand for gold for the rest of 2010 will be underpinned by the following market forces:

Outlook

  • Increasing demand by the world’s two largest markets, India and China, as rising income levels, high savings rates and strong economic growth continue to push up consumption.
  • Gold jewellery demand is likely to exceed that of 2009 due to an anticipated recovery in India, the most significant gold jewellery market, and continuing strength in China. While jewellery demand may face challenges ahead, the latest figures show that demand in key markets has shown resilience in the face of higher prices levels.
  • Concern over fiscal imbalances and currency tensions will continue to support investment demand for gold. Aside from the recent additional US$600 billion of quantitative easing by the US, the weakening of the US dollar and associated fears of inflation, demand is also likely to be driven by higher gold price expectations, as well as increasing availability and accessibility of gold investment products to retail investors.
  • Industrial demand, which has returned to long-term levels, is expected to remain firm on the back of renewed growth in the electronics industry, due to the majority of semi-conductors being wired by gold.

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Key demand statistics:

  • Total gold demand was 922 tonnes, an increase of 12% from Q3 2009. In US$ value terms, demand grew 43% to US$36.4 billion over the same period.
  • Demand for gold jewellery increased by 8% from Q3 2009, with four of the best performing markets – India, China, Russia and Turkey – accounting for 63% of global demand. In value terms, global demand for the 12 month period ending September 2010 hit a record US$137.5 billion.
  • Retail investment rose 25% from Q3 2009 to 243 tonnes. The largest contribution to total demand growth came from bar hoarding, which increased 44% from the previous year. The total value of net retail investments during the quarter was a record $9.6 billion, representing a 60% increase from Q3 2009.
  • Total gold ETF demand fell by 7% from Q3 2009 to 39 tonnes. Following a remarkable surge in the previous quarter, which was supported by heightened sovereign risk and currency worries, this quieter period for ETFs reflects consolidation in the market, as it contemplated the prospect of QE2.
  • Industrial demand has recovered back to pre-crisis levels of 110 tonnes, reflecting an increase of 13% from Q3 2009. This recovery was driven by improving demand for consumer electronics goods globally, in particular from emerging markets such as China and India, as well as an increased range of new technology products with gold components.
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Secure your gold lifejacket before the QE2 sets sail

What is QE?

With all the talk of another round of huge stimulus in the US, this latest attempt at kick starting the largest economy in the world is being deemed QE2.

For those in the know, the QE refers to Quantitative Easing – the method of injecting funds into an economy when all else has failed.  The 2 in the title refers to the fact that it will be the second huge cash injection the US have performed in the past couple of years.

In the UK QE2 is best known for our luxurious flagship cruise liner.

But this round of QE would be better compared to another famous historical luxury cruise liner – The Titanic.  Like the Titanic ship, QE2 will be huge. Its not worth the US Government injecting peanuts.

But this time we can all see the iceberg coming. Any QE program is an obvious sign of desperation for a Central Bank.  Indeed figures last week showed the US economy growing at half the pace of the UK’s economy last quarter, which is pedestrian itself.

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Spiralling Quantitative Easing

The fact that the previous stimulus program failed to steady the ship is not a good omen for the latest sticky plaster being placed over the US economy. Simply adding more Dollars poses a huge threat to inflation by its very nature of undermining the value of a currency which has already lost 12% of its value in the past 2 months.

Let’s not fool ourselves, it’s the US tax payer who will have to repay the debts being taken on to provide the stimulus. Just like we are experiencing now in the UK, tax hikes and future spending cuts will have to be implemented to pay back the money.


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The gamble is for the economy to grow quicker than the rate of interest on the QE, otherwise you see a spiralling debt large enough to sink any ship.

So as we set sail on this latest round of stimulus, surely it’s wise to have protection in case we cannot navigate around the iceberg. We all know that holding physical gold acts as a lifejacket when economic and political catastrophe strikes. It can provide the lifeboat- for the average saver and investor to escape going down with the ship.

The saying goes that when the US sneezes, the UK gets a cold. So we’re all on board as the latest QE2 sets sail. Let’s make sure we hold some investment gold in our portfolio, or we risk sinking with the ship’s band and captain!