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Fund Pro Says Holding Physical Gold Reduces Risk

Release Date: 
Tuesday, June 26, 2012

Gold prices were lower on Tuesday as the dollar rose ahead of the European Union (EU) summit this week. Gold was $7.50 lower at 7:08 a.m. Pacific Time on the New York Spot Market, trading at $1,578.80 per ounce. Spot silver was $0.21 lower, trading at $27.43 per ounce. (Click here for the most current spot prices.)

"Gold is capped on the upside by disappointment post-Fed, while on the downside, we have some bargain hunting, and a bit of physical buying into the troughs," Societe Generale analyst Robin Bhar said. "We are stuck in a fairly small range here, in the 1570-1600 area, certainly until the weekend when we will get to hear more on how the euro zone will be (tackled)."

IG Markets analyst Cameron Peacock Analysts suggested that deterioration in global business sentiment is triggering a move into safe-haven assets such as gold. "It is clear that we have seen that positive correlation re-emerging a little bit," he said. "On days and periods such as these, there are generally not too many places to hide" amid a broad sell-off in equities, Mr. Peacock added. "Gold just might hold its ground and be a place where you can hide out for a little while."

Simon Mikhailovich, Managing Member of Eidesis Capital, makes the case for holding physical gold. He says with financial systems being more correlated than ever, holding physical gold is a way to ensure that there is no counter-party risk. "I think gold has been a trading vehicle in the West," he said. "Essentially since World War II in Europe and in the United States since the 1930s, financial professionals have not lived through a situation where things have not quickly recovered. And so the idea of what is a safe haven has become government bonds. But in fact, the financial system today is more correlated than it has ever been because of the financial technologies like credit default swaps and other credit derivatives. And the only hard asset that is liquid that exists outside the financial system that does not have counterparty risk, is physical gold."

"I think if you think in military terms -- and the military is an organization that has thousands of years of history of how to manage contingency planning and reserves -- no general goes into a battle without having reserves, and no general has his reserves in the theater of operations. So, if you think a financial system is potentially having systemic risk, then whatever it is you own as insurance should not be in the theater of operations. And any paper gold, by its nature, is in the theater of operations, because it has counterparty risk. So only physical bullion that is stored outside the financial system…and hopefully with geographic diversification…is a true safe haven."

(Sources: "PRECIOUS METALS: Gold in Tight Band in Asia; Safe-Haven Allure May Appeal," Wall Street Journal, June 26, 2012 ; "PRECIOUS-Gold eases below $1,580/oz ahead of EU summit," Reuters, June 26, 2012; "Physical Gold Is a True Safe Haven: Pro," CNBC, June 19, 2012)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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