By Kishori Krishnan Exclusive To Gold Investing News ^[1]

^[2]After hitting $1,000 an ounce last month, the gold price has since settled back to the $920 range, which still represents a more than 28 per cent increase from October, when it hit its most recent bottom near $700. The current price of gold, which was selling for $250 an ounce in 2001, is just too rich for some advisers, but there are others who insist an allocation to gold remains paramount in these uncertain economic times.

"With the debasing of currencies in developed economies, you need something with global liquidity, and gold is it," said Dawn Bennett, chief executive of Bennett Group Financial Services LLC, a Washington-based firm with $1 billion under advisement. "I'm anticipating inflation, and gold will be a hedge against that," said Ms. Bennett, who recommends allocations to gold and natural resources of 25 per cent to 40 per cent.

"We're in a lopsided world, and your portfolio also needs to be lopsided," she added. Ms. Bennett, who moved her clients out of domestic equities at the end of 2007 when the market was double what it is today, anticipates a heavy allocation to gold "for the rest of our lives."

Using gold in a portfolio for the long term also makes sense to Robert Levitt, president of Levitt Capital Management LLC, a Boca Raton, Fla.-based firm with $350 million under management. At 10 per cent, gold is Mr. Levitt's largest holding. "I haven't been below 4 per cent in gold since it was $300 an ounce," he said. "We will be forever in gold."

But Mr. Levitt hedges within his allocation by holding gold in emerging currencies that are likely to decline in value, as well as the U.S. dollar and through a gold-mining company ETF, Market Vectors Gold Miners ETF (PCX: GDX), offered by Van Eck Securities Corp. of New York.

On Friday, gold was down 0.3 per cent to $937 an ounce from New York's notional close. Gold edged higher on Friday as stocks reversed initial gains, but trade was choppy after payrolls data showed the U.S. economy shed more than half a million jobs in February. The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, said its holdings eased to 1,028.99 tonnes as of March 8, down 0.3 tonne from the record 1,029.29 tonnes that was first hit on February 26.

Gold ETF

However, if ETF's are the answer, NASDAQ Dubai ^[3] and the World Gold Council ^[4] launched their long-awaited gold exchange traded fund (ETF) last week, which is both Shariah-compliant for Islamic investors and 100 per cent backed by physical gold. World Gold Council CEO Aram Shishmanian said that the new ETF is aimed squarely at both local investors who want to buy just one-tenth of an ounce of gold as well as regional institutions that want to invest more than $1 billion (Dh3.67 billion).

This is by no means a derivative product because it is 100 per cent backed by allocated gold held in vaults in London by HSBC, and audited both by traditional and Shariah auditors. It is important to understand the difference between unallocated and allocated gold. The Dubai ETF has allocated gold, so there is no third party acting between the metal and its owner. The ETF certificate is an entitlement to one-tenth of an ounce of gold. Given the fact that the WGC has created ETFs on 12 exchanges over eight years, today $38 billion of gold is held in these ETFs, or 1,200 tonnes, more than many national reserves.

Before ETFs, it used to cost investors about five per cent to get in and out of gold, now it is 60 basis points. In the GCC region, there has been a 40 per cent increase in demand for gold in the past year, and 114 per cent increase in the past four months. "It is an opportune time to launch in Dubai," said the CEO. "There is substantial latent demand from investors. Gold is a safe haven, a protection against inflation, a weaker US dollar and third party failures as well as a risk adjustor for investment portfolios," he added.

Gold and bonds are the only asset classes to show a positive performance in the past 12 months. There has been a structural shift towards gold as an investment immune from third party failure at a time of systemic risk in the financial sector. The pumping of huge amounts of money into the global financial system by central banks could well lead to inflation, and make gold positive, analysts maintain. The idea that central banks will be able to successfully manage this rush of liquidity is touted as unrealistic. Gold bugs say a golden scenario for gold price is thus being set up, and further problems in the financial sector and slumping stocks can only increase gold's appeal.

Blue?

The most obvious way to hedge against inflation and rising inflationary expectations is with gold and gold equities. However, gold stocks are not performing up to their potential in light of the relatively buoyant market for bullion. Analysts have advanced several interpretations of the relationship as shown by gold stock to gold ratio. The simplest explanation is that junior gold stocks or gold equities are cheap relative to bullion and that they should be bought now.

A possible explanation being advanced is that as gold prices advance, gold stocks have lost much of their speculative appeal as levered vehicles to play the rise of the yellow metal. When gold prices were $300 an ounce about a decade ago and production costs of the senior miners were in the $200-250 range, gold stocks were in effect call options on gold with a strike price in the $200-250 area.

As gold price rose, gold equities became deep in the money options and their leverage to gold declined. Speculators who wanted to play the rise in the gold price lost interest, especially with the introduction of very liquid gold ETFs around the world. There are a few cautionary tones: gold mining companies have exploration upside, operational risk (strikes, fires, etc.) and political risk, which the synthetic gold stock does not; gold mining companies may hedge the gold price with forward sales and other derivatives (but most don't these days other than for the purposes to lock in a price to develop a new property); and actual gold mines can somewhat manage the cost of production by high-grading when gold prices are low and mining a lower grade of ore when prices are high. The synthetic gold stocks assumed cost is inflexible.