16 March 2010

Yesterday we wrote of the long term expectations of gold; However, there are risks to gold, governments could try to regulate the ownership of gold as FDR’s America or Vietnam currently do. Or they could simply attempt to control the price again as they did for most of the last century. Also, central bank gold reserves risk being replaced in the long term by a basket of currencies according to Bob Lyon, portfolio manager on the Smith & Williamson Global Gold and Resources fund, who recently warned that special drawing rights could be used to diversify currency exposure in central bank reserves instead of resorting to gold as a safe haven. The most under exposed central banks in general are those of Emerging markets. EM’s have mooted using special drawing rights widely post financial crisis, as quantitative easing has caused fears over the status of the US Dollar. This would remove the major driver from gold markets.

In the near term, Bob Lyon views a rise in real-term interest rates as the main risk to the gold prices. Higher interest rates in the US would make the dollar more attractive, lessening demand for gold as a replacement reserve currency.