'Good as gold' still rings true

Gold bullion is bought for a wide variety of reasons. Photo / James Ensing-Trussell

Demand for gold is soaring and NZ Mint has opened the country's first trading floor in its new Auckland CBD headquarters.

The mint's head bullion trader, Mike O'Kane, says gold has never been more popular.

The price is currently relatively static, trading in a tight range around US$920 ($1356) to US$970 an ounce, after peaking at a record of more than US$1000 an ounce in February.

But O'Kane expects strong price growth in the next six months as the US dollar weakens and inflation pressure climbs following last week's forecast of a US$9 trillion federal deficit facing the United States.

China, Russia and the United Arab Emirates have been "bulk buyers" of gold in the past two years, O'Kane says - while at the same time divesting themselves of cash holdings in US dollars.

Demand at an investor level also increased with the global financial crisis, which boosted awareness of gold as a good hedge against inflation, and a way to diversify investment portfolios.

"We believe a diversified portfolio should have at least five or 10 per cent of its value in gold," O'Kane says. "The most effective way to diversify and protect a portfolio is to invest in assets that are negatively correlated to the financial markets."

When Lehman Brothers crashed, the mint averaged the equivalent of a month's turnover every day for two weeks.

Presently, the only way to buy investment gold locally through New Zealand companies is to buy physical bullion and store it securely.

NZ Mint offers vault storage as part of its precious metal exchange service as well, and a demonstration and seminar area is being installed for people interested in how gold is turned into a tradable form.

Clients of the exchange range from a 7-year-old gradually building up small investments in silver bullion through to high-value clients from the United States who buy and hold here, viewing New Zealand as an investing safe haven.

While most people think of gold as a medium- or long-term investment, there are also seasonal fluctuations investors can take advantage of.

"An example is the Indian wedding season, when demand on the sub-continent sky-rockets as around 900 tonnes of gold is gifted as dowry," says O'Kane.

He's had clients who have bought $50,000 worth of gold and sold it months later at almost 100 per cent profit.

At present, "we're riding on the crest of a nice exchange rate hedge," O'Kane says.

Why turn to gold

* It's a hedge against inflation and a declining dollar, and a safe investment haven in times of political and financial instability.

* Production is declining and demand is growing in China and India.

* Gold is a safe way to store wealth, maintaining its intrinsic value. It's also a portfolio diversifier.