One More Reason to Be Bullish on Gold

One of the reasons I have been bullish on gold is that central banks worldwide are changing their stance on the "barbarous relic" -- particularly in dollar-surplus Asian countries. This week provided more evidence of that shift, in a development that was not widely reported, but that could ultimately have a significant impact on gold prices.

South Korea: Jumping on the bandwagon?
The Financial Times reported that South Korea is considering increasing its gold holdings to diversify away from the dollar and other major currencies. This is notable for three reasons:

  1. South Korea is the fifth-largest holder of foreign exchange reserves.
  2. At 0.2% of reserves, South Korea's current allocation to gold is minuscule. By comparison, the world average is 10%, according to the World Gold Council.
  3. South Korea has publicly dismissed the idea of investing in gold in the past

These are big numbers ...
To get an idea of the shockwave South Korean purchases could send through the gold market, consider this: If South Korea decided to raise its gold holdings to meet the world average (10% of reserves), it would need to purchase roughly $28 billion worth gold. That sum is approximately equal to the total investment demand for gold in the first half of 2010 and represents more than 40% of total demand (i.e., from all sources: investment, jewelry, industrial, and dental). Price impact, anyone?

... but it's no done deal
Before you gold bulls break out the Champagne, it's worth noting the distinction between considering buying gold and actually doing so. According to the Financial Times, there is no consensus within the South Korean central bank on buying gold, and even if there were, who knows what allocation they would target? Still, the very fact that it is even entertaining the notion reflects the broader change in attitude that is occurring in the official sector worldwide toward gold, as governments compete in a race to the bottom to devalue their currencies.

How to think about gold now
This is my stance on gold: It is a speculative asset because it's impossible to assign it an intrinsic value, but I think the secular bull market in gold continues, with central bank purchases contributing to support it. For investors who wish to participate, several options are available, including the SPDR Gold Shares (NYSE: GLD  ) , the iShares Gold Trust (NYSE: IAU  ) the Sprott Physical Gold Trust (NYSE: PHYS  ) , and the Central GoldTrust (AMEX: GTU  ) . Note that the latter two are closed-end funds.

Fool contributor Alex Dumortier, CFA, has no beneficial interest in any of the stocks in this article.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 21, 2010, at 5:03 PM, keithfredrickson wrote:

    You put the link to SPY in instead of GLD. FYI

  • Report this Comment On October 21, 2010, at 6:17 PM, TMFAleph1 wrote:

    Well caught, Keith. We've corrected the error.

    Alex Dumortier

  • Report this Comment On October 22, 2010, at 2:16 PM, langco1 wrote:

    the big hedge funds that drove up gold prices to ridiculous levels are now selling to lock in year end gains this is already causing sharp drops in gold prices ..time to be short gold...

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