Gold - Today's Essential Strategic Investment

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Gold

Today’s Essential Strategic Investment

Written by Michael Roney

There once was a time when gold was considered a relatively esoteric holding— the classic hedge against inflation and economic uncertainty that involved purchasing and securely storing bullion, buying into mines or engaging in futures trading. These days gold investment is much simpler and certainly more ubiquitous. This precious metal has retained all of its rock-solid qualities for safety and value, but now a large range of investors are easily incorporating it in their portfolios through exchange traded funds (ETFs) that combine ownership with convenience and flexibility.

Gold's Natural Benefits

Amid an unpredictable global economy, financial experts remain focused on gold as both a strategic and a safe-haven investment for 2010 and beyond. Investors ranging from individuals to endowments and other large institutional funds are turning to gold for its unique attributes:

Gold as a monetary asset is considered a protector of wealth. This is an attribute valued by central banks, which during recent years have shifted from net sellers to net purchasers of gold. Recently India, Mauritius and Sri Lanka made purchase announcements along with ongoing programs by the central banks of Russia and China to strengthen their monetary reserves.

Gold has historically served as a hedge against inflationary pressure.

This spring, the spot price of gold passed $1,240 an ounce, the tenth straight year of growth, and experts predict that demand will rise throughout 2010 as economic stability continues to waver.

Gold has historically offered protection in environments when the U.S. dollar and other currencies were buffeted by global economic events.

The supply of gold changes gradually, unlike a currency, which can be debased when more of it is printed. Mining production has slowed down in recent years.

Gold demand comes from a range of areas. According to the World Gold Council, investment demand, including gold ETFs, gold coins and bars, accounts for only 30% of the gold supply, while jewelry demand accounts for 58%, industrial demand for 10% and dentistry 2%.

Gold is typically less volatile than major stock market indices such as the S&P 500, and is much less volatile than other commodities thanks to its liquidity, the availability of large aboveground stocks, and the geographical diversity of mines and reserves.

A Strategic Investment During Economic Uncertainty

Thanks to positive industry demand and supply dynamics, investors in recent years have bought gold for tactical short-term appreciation purposes, and they have been well rewarded because gold’s value has trended upward. However, many are investing in gold as a strategic portfolio commodity allocation. Because its value does not correlate with the price of equities, bonds or even other commodities, gold is an effective tool for diversification, with an optimal weight comparable to asset classes such as small cap and emerging markets.

“We have seen the use of gold evolve over the last several years,” says Thomas K. Anderson, vice president and head of strategy and research for State Street Global Advisors, which markets the first and most successful gold ETF, SPDR® Gold Shares (Symbol: GLD). “We’re seeing a broad set of investors—including hedge funds, brokerage firms and their advisors, and endowments and foundations with sizable positions in gold—allocating 2% to 5% on a strategic basis. Gold offers many of the classic attributes you want in a portfolio investment, including positive supply-demand characteristics and low correlations to other asset classes.”

A growing number of investors are recognizing

that over the long term gold fulfills a strategic role within an investment portfolio. In November 2004, State Street and World Gold Trust Services launched SPDR Gold Shares [NYSE Arca: GLD], the first U.S. commodities-based exchange-traded security that has resulted in broader investor access and understanding of the gold market.

GLD offers investors an innovative, cost-efficient and secure means of participating in the gold bullion market without the necessity of taking physical delivery. This is achieved by allowing investors to hold an interest in gold just like a stock. The introduction of GLD has lowered many of the barriers that had previously prevented some investors from investing in gold, such as access, custody and transaction costs. In 2009 SPDR Gold Shares surpassed $40 billion, making it the second-largest ETF in the world, by assets.

The SPDR Gold Trust has filed a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration statement, including “Risk Factors,” and other documents the Trust has filed with the SEC. You may get these documents for free by visiting EDGAR on the SEC Web site at www.sec.gov. Alternatively, you may request the prospectus by calling 1-866-320-4053 or contacting State Street Global Markets, LLC, One Lincoln Street, Attn: SPDR Gold Shares, 30th Floor, Boston, MA 02111.

“SPDR” is a trademark of the Standard & Poor’s Financial Services, LLC and has been licensed by use for the Sponsor. The “SPDR” trademark is used under license from Standard & Poor’s Financial Services, LLC (“S&P”) and the SPDR® Gold Trust is permitted to use the “SPDR” trademark pursuant to a sublicense from the Marketing Agent. No financial product offered by SPDR® Gold Trust, or its affiliates, is sponsored, endorsed, sold or promoted by S&P. S&P makes no representation or warranty, express or implied, to the owners of any financial product or any member of the public regarding the advisability of investing in securities generally or in financial products particularly or the ability of the index on which the financial products are based to track general stock market performance. S&P is not responsible for and has not participated in any determination or calculation made with respect to issuance or redemption of financial products. S&P has no obligation or liability in connection with the administration, marketing or trading of financial products.

WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT NOT LIMITED TO LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

Protection Against Inflation

Today’s investors continue to buy gold as protection against the increased risk of inflation— an especially important consideration as governments around the world have assumed more debt to fund the trillions of dollars in bank bailouts and economic stimulus programs.

“If you look at the statistics, there is little sign of inflation currently,” Anderson notes.

“However, the interventions by the European Central Bank and by the Federal Reserve over the last couple of years could all potentially be inflationary over the long term. Many institutional investors as well as investment advisors are very worried about future inflation and how the exit from this looser monetary regime will be transitioned.”

A Critical Hedge Against Global Instability

Although the U.S. economy seems to be recovering in fits and starts from the worst financial crisis in 70 years, sovereign debt issues and ongoing instability in global markets—evidenced by the EU’s bailout of Greece—is creating uncertainty, volatility, and a lack of confidence in certain currencies, the euro being the classic example. In times like this, advisors look at gold as another form of currency, but one with no risk related to default on debt.

“Investors are examining things they didn’t even think they had to worry about a few years ago,”
states Anderson. “People are thinking it may be worthwhile to take out some insurance against events that may not be likely but are certainly possible. It may be worthwhile to build some portfolio protection against these risks, such as inflation, before they become real problems.”

Buying Gold With ETFs

In November 2004, SPDR Gold Shares was introduced to the market as gold’s first ETF that could be traded in real time over a stock exchange.

SPDR Gold Shares offered the ability to buy an interest in gold without having to take physical delivery. It also leveraged all of the precious metal’s valuable attributes with the ease of trading a stock through a brokerage or retirement account on a regulated stock exchange. This effectively lowered many of the associated ownership barriers—access, custody and transaction costs—that had previously prevented many from investing in gold. This approach has since become the de facto way for investors to access gold. “It gives you a liquid, low-cost exposure to gold bullion,” Anderson notes. “You actually own a share in the core asset, in a low-cost, convenient format.”

There is now an incredibly wide range of retail and institutional investors in gold, with over $46 billion in SPDR Gold Shares today—a direct result of unprecedented access to the world’s essential strategic investment.