Are we approaching the end game for paper currencies?
``You can't find a currency that you trust as a store of value, so you create a new one,''
Gold Beats Financial Assets as Investors Seek Haven (Update1)
By Millie Munshi and Pham-Duy Nguyen
March 3 (Bloomberg) -- Gold, silver, platinum and palladium may be the best-performing financial assets this year as inflation and slowing growth erode the value of the world's major currencies, bonds and stocks.
Precious metals have risen at least twice as fast as the euro and yen in 2008 and returned six to 20 times as much as U.S. Treasuries. The Standard & Poor's 500 Index and all other major gauges of equities are down. Gold for immediate delivery reached an all-time high of $980.98 an ounce today, while silver on Feb. 29 was the most expensive since 1980.
Investors are using metals to preserve their buying power as the U.S. dollar falls to a record and inflation accelerates. Gold, platinum and palladium may gain at least 30 percent this year as Federal Reserve Chairman Ben S. Bernanke prioritizes cutting interest rates over controlling consumer prices, said Ron Goodis, a trader at Equidex Brokerage Group Inc. in Closter, New Jersey, who has been buying and selling gold since 1978.
``It is hard to see how the monetary environment is going to be anything but supportive of higher gold and commodity prices anytime this year,'' said Chip Hanlon, who holds gold as manager of $1.5 billion at Delta Global Advisors Inc. in Huntington Beach, California. ``If currencies don't carry a favorable interest over metals, then why not own gold or platinum?''
Most metals are traded in dollars, tying their prices to how much the currency buys in the world economy. Gold rose 36 percent since Sept. 18, when Bernanke made the first of five cuts to the target rate for overnight loans between banks in order to stave off a U.S. recession. It's up 15 percent since breaking the 1980 record in January, and may rise another 33 percent to $1,300 an ounce by yearend, Goodis said.
Platinum, Palladium
Platinum and palladium -- sister metals used to make jewelry, catalytic converters for cars, and dental crowns and bridges -- have advanced even more this year.
Platinum futures in New York gained 42 percent and touched a record $2,214.50 an ounce Feb. 22. It may advance 38 percent more to $3,000 by yearend, said Goodis, who correctly predicted its surge earlier this year. Palladium will probably reach $750 an ounce by June, a 30 percent gain from the current price, he said.
Silver will advance another 26 percent to $25 an ounce sometime this year, estimated David Davis, an analyst at Credit Suisse Standard Securities in Johannesburg.
Bernanke lowered rates faster than any Fed chairman since 1982, and inflation in 2007 jumped 4.1 percent, the most in 17 years. U.S. housing starts in December fell to the lowest level since 1991, and fallout from the collapse of the U.S. subprime mortgage market has triggered $181 billion in writedowns and credit losses at the world's largest financial firms.
Record Low Dollar
Turmoil in the financial markets and slowing economic growth pose ``greater risks'' than inflation, Bernanke told the House Financial Services Committee in Washington on Feb. 27. The Fed ``will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,'' he said, signaling he was prepared to make a sixth reduction in rates.
The U.S. Dollar Index, which tracks the currency against six major counterparts, touched 73.531 today, the lowest since its start in 1973. Even gold traded in euros, yen and pounds reached records this year as consumer prices rose around the world, eroding the appeal of currencies as an asset.
The Bank of England cut borrowing costs twice since November. European Central Bank President Jean-Claude Trichet resisted similar moves because inflation in the 15 nations that use the euro rose to a 14-year high of 3.2 percent in January.
`Under Your Bed'
``You can't find a currency that you trust as a store of value, so you create a new one,'' said Robert Fullem, vice president of U.S. corporate foreign-exchange sales at Bank of Tokyo-Mitsubishi in New York. ``Safety ends up being a piece of metal. You can stick it under your bed, and sometimes that's your best bet.''
The rally in metals may be fleeting should some of the biggest holders sell or the dollar rebound.
The U.S., the largest shareholder of the International Monetary Fund, said Feb. 25 it may allow the IMF to sell as many as 401 metric tons of gold to meet budget shortfalls. The Fed forecasts food and energy costs will stop climbing in the months ahead. Frankfurt-based Deutsche Bank AG, the world's biggest currency trader, expects the dollar to rise to $1.37 against the euro by yearend.
``Gold is not a currency -- you're never going to be able to use gold coins at the 7-Eleven,'' said Ralph Preston, an analyst at Heritage West Financial Inc. in San Diego.
Gold, which once backed the U.S. dollar and British pound, reached a 20-year low of $253.20 in July 1999 as U.K. Prime Minister Gordon Brown, then the chancellor of the exchequer, spearheaded an effort to sell the precious metal and invest in government bonds.
Northern Rock Run
That year Peter Ward, a mining analyst at Lehman Brothers Inc., predicted the metal would hover at about $280 over the following three to four years, as other central banks followed Brown's lead. By the end of 2003, it was at $417 because the dollar had been falling. Ward declined to comment last week, and New York-based Lehman estimates gold will average $880 in 2008.
Gold & Silver Investments Ltd., a Dublin-based precious metals broker, said demand for gold there jumped 20 percent from mid-September to mid-October as the subprime crisis spurred depositors at Northern Rock Plc to make the first run on a U.K. bank in more than a century.
At least 95 percent of the new buyers have kept their money in the bullion, Mark O'Byrne, Gold & Silver's executive director, said in an interview on Feb. 26.
``They were very, very nervous and wanted security,'' O'Byrne said. ``Some were putting their entire savings into gold. They were that nervous.''