Investors buy gold as fears of inflation rise

By Harry Wallop
The Telegraph, London
Friday, June 12, 2009

http://www.telegraph.co.uk/finance/personalfinance/investing/gold/551553...

Private investors are buying gold in an attempt to protect themselves against a rise in inflation, trade figures indicate.

Figures from gold brokers suggest that small investors are buying up physical gold, such as bars and coins, as well as so-called "paper gold," such as shares in gold companies and gold funds, in far greater quantities than a year ago.

GoldMoney is a company that allows investors to buy gold bars or stakes in the bars, which it then stores in vaults on clients' behalf. A year ago it held $352 million worth of customers' gold in its vaults. This has nearly doubled to $694 million by the end of May.

These figures echo official data, which suggests demand for gold has increased substantially over the last 12 months, with some fears there could even be a shortage around the world.

This is despite the global recession, which has pushed down the demand for jewellery, especially in India, the biggest gold jewellery market in the world.

According to the World Gold Council, retail investors around the world bought 131 tonnes of gold in the first three months of this year, an increase of 33 per cent.

The main attraction for investors is that gold is seen as the ultimate hedge against inflation. While the pound or dollar may lose their value, depending on the fortunes of the economy, gold historically goes up in value when inflation gathers pace. That is because everyone from market traders to high-powered investors would prefer to be paid in gold when cash starts to lose its worth.

Many fear that inflation will shoot upwards later this year or next as a result of the extra money that has been pumped into the economy, following the quantitative easing programme undertaken by the Bank of England.

Currently inflation, as measured by the Retail Prices Index, is running at -1.2 per cent. But most experts believe this deflation will soon change to inflation.

Daniel Wills, senior analyst at ETF Securities, said: "Inflation is starting to loom large. Historically, high inflation is associated with high returns for gold. It is a key safe haven, a safe store for wealth when paper money decreases in value."

His company's gold inflows -- the amount customers are buying -- has doubled from $770 million a year ago to $1.5 billion.

The gold price, while very volatile, has climbed from $870 a troy ounce in April to $950 this week.

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