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Gold crucial in escape from crisis: Baker Steel
Magazine: InvestmentAdviser Published Monday , June 14, 2010
Gold will prove the anchor in either of the likely money printing or default routes out of the debt crisis, according to resources house Baker Steel.

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AdvId: 2577119 AdId: 225596033 CrId: 36933108In such an environment, the group – which runs a gold fund for Ruffer – said selected gold equities offer compelling value and could easily decouple from weakness in general markets.

Lead manager David Baker said strong buying out of Europe has propelled gold to new highs in several currencies as investors sought safety from the gathering sovereign debt situation.

"As investors dumped the euro, the US dollar has benefited although not to the same extent as gold, which is now the currency of choice for many investors," he added.

"Gold is signalling something is just not right - will the ECB have to resort to the printing press given that the austerity packages in the Piigs (Portugal, Ireland, Italy, Greece and Spain) economies could well tip those countries into a deflationary spiral?"

Baker Steel highlights a recent lecture by historian Niall Ferguson, highlighting three possible escape routes from a debt crisis, namely cutting public spending, printing money or default.

According to Mr Ferguson, there has only one successful example of growth under fiscal austerity, and that was Britain between 1815 and 1914, a period that included the industrial revolution.

"History would imply the outcome will be either printing or default: in either case we believe gold will be the anchor to weather the challenges ahead," added Mr Baker.

Looking at current fundamentals in the market, there has been a distinct lack of recent gold supply from central banks, which are becoming increasingly reluctant to sell down holdings.

Mine production also peaked in 2001 so this limited supply is set against growing demand, both as a reserve currency and potential hedge against inflation risk in many countries.

Mr Baker said gold shares gave back some ground relative to the metal in May but as the dollar and gold both moved together, the price in producing countries’ currencies outperformed the dollar move.

"Operating margins in many regions have soared and, in our view, selected gold equities offer compelling value," he added.

This is despite the current situation in Australia, where the government seems intent on imposing a Resource Super Profits Tax on the industry without prior consultation.

"We, like many others, have not fathomed how raising taxes increases economic growth, a central argument to the government’s case," added Mr Baker.

"It is reasonable to assume there will be tax reform but the public spat between the government and miners is not helping sentiment. Given the move in the Aussie dollars gold price, Australian gold equities are now discounting close to what we can only perceive will be the worst outcome."

Over 12 months to May 24, the CF Ruffer Baker Steel fund is up 76.5 per cent, more than 30 per cent above the next best performing portfolio investing in the precious metal.