Audio Interviews

Natalie Dempster

Head of Investment

World Gold Council

Interviewed by

Brendan Coffey

Sponsored by

Investing in Gold

The ultimate safe-haven asset offers growth and stability.

By Brendan Coffey

With the economic crisis in full force last year, gold showed its true worth. While almost every other major asset class — from stocks to currencies to commodities — plunged as a result of the credit crisis, gold leapt 23% on the New York Mercantile Exchange in the final two months of 2008 as investors worldwide rushed to the historical investment of last resort to protect their portfolios.

“Gold stood out as the safe haven that genuinely provided diversification,” notes Natalie Dempster, head of investment for the World Gold Council. “It does not correlate with equities, bonds or even other commodities.”

There are many reasons to make gold a core part of your investment portfolio, especially during periods of economic turmoil, and many investors already have.

• Gold possesses a unique status as both a means of exchange and a commodity with fundamental demand.


• As a physical asset, it has no counterparty risk.


• Since 2000, gold prices have rallied each year, recently hitting $1,000 an ounce.

Today’s investors are buying gold as protection against inflation. Quite simply, the issuance of more government debt to fund the trillions of dollars in bank bailouts and economic stimulus increases the risk of long-term inflation. The situation is akin to the 1970s, when enormous federal spending on Vietnam and various social programs led to rampant inflation as high as 22% by the early 1980s.

Unlike a currency, which can be debased when more of it is printed, the supply of gold essentially doesn’t change — the market takes into account the estimated quantity of gold that is underground and minable. As a result, gold thrives in inflationary times. Since the price of gold was first allowed to float freely in 1971, the yearly U.S. Consumer Price Index has exceeded 5% nine times, says Dempster. Each time, stocks and bonds were at best flat for the year while gold gained an average of 30%.

Fundamental Strengths Lay Groundwork for Price Appreciation
Make no mistake, gold is more than a speculator’s game. In fact, investors account for less than one-third of the gold supply. Gold is used in a wide range of industrial applications, from catalytic converters to space flight. Since it is highly conductive of electricity and resistant to corrosion, it also frequently finds its way into household products like audio equipment and USB cables. And of course, consumers in markets around the globe desire the metal for jewelry. Consumer demand for gold jewelry claims 58% of the market, according to the World Gold Council. Investment accounts for 30%, industry 10%, and 2% is used in dentistry.

A slowdown in gold mining is also adding to the upward price swing. The historic lows gold touched in the late 1990s largely halted research and development by miners around the world, a slowdown that is still being felt today. The current corporate funding crunch continues to affect the ability of companies in the capital-intensive mining industry to find and excavate more gold, so supply will continue to be tight for the foreseeable future.

How to Add Gold to Your Portfolio
In the past, investing in gold has taken one of two forms: purchasing physical bullion or buying gold futures through a broker. Each method has its benefits, but also its inconveniences. While buying physical coins and bars yields the security of holding the actual asset, and it is very liquid, it brings the long-term costs of transporting, storing and insuring one’s holdings. In addition, investor interest in bullion means there have been spot shortages of gold in some markets, with what is available fetching a premium.

Futures allow you to invest in gold through a broker without the associated difficulties of holding your own gold. They bring their own complexities, including face values well over $100,000 per contract and the need to periodically buy and sell contracts to maintain your position in the most liquid future. Futures are also a favored instrument of hedge funds, making the trading of gold futures much more volatile than individual investors typically can tolerate, according to Dempster.

In late 2004, the first gold exchange-traded fund (ETF) was introduced to bridge the gap, combining the ability to buy an interest in gold (without taking physical delivery), which is stored on one’s behalf, with the ease of trading a stock through a brokerage or retirement account. That ETF, the SPDR Gold Shares (ticker: GLD), had 1,127 tons of gold worth $32 billion as of the end of the first quarter in 2009, at which point there were 1,658 tons of gold held by ETFs globally. GLD SPDR Gold Shares is sponsored by a subsidiary of the World Gold Council and marketed by State Street Global Advisors. The actual gold represented by the shares is held in the investor’s name by HSBC in London, with total expenses amounting to 0.4% a year, lower than the average mutual fund expense ratio, which is about 1.3%. Explains Dempster: “GLD is an easy and cost-effective way to access the gold market.”