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Friday, May 20, 2011

Investors Are Going Directly to Physical Gold

The latest shock to the financial system came this week with news that Standard & Poor's issued a warning on its outlook for America's debt rating. The bond rating agency lowered the outlook for the present AAA rating to negative. According to Standard and Poor's, that warning implies a 33% chance of a negative rating change in the next two years.

Investors around the world dumped shares of American companies following the news. After the initial shock, share prices largely rebounded as the warning was hardly a new revelation.

The S&P action will undoubtedly increase downward pressure on the US dollar. Gold and other metals will benefit from that negative outlook. Firstly, a decrease in the value of the dollar results in an immediate increase in the nominal price of commodities as measured in dollar terms. More significantly, growing concerns over the security of paper assets like American debt is generating an increasing level of interest in hard assets, with gold being at the top of the list. The ongoing concerns in Europe add to the general unease with regard to currencies.

In seeking safety in gold, investors are going directly to physical gold. Bar sales have grown rapidly while the net holdings of exchange traded funds have declined. Gold equities, for the moment, are losing their role as a proxy for gold as investors seek a high level of security. As bullion continues to appreciate, the share prices of gold companies will bounce back, to reflect the underlying values based on the rising gold price.

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