Date:29/09/2004 URL: http://www.thehindubusinessline.com/2004/09/29/stories/2004092900161100.htm

Back Gold safer bet than currencies: Study

Our Bureau

Mumbai , Sept. 28

GOLD offers consistently good protection against exchange rate fluctuations, particularly against the dollar, research by three economists from United Kingdom has revealed.

The research released by the World Gold Council (WGC) has used statistical analysis of the relationship between gold and the exchange rates of various currencies against the dollar.

The research was conducted by Mr Forrest Capie, Professor of Economic History at the Cass Business School; Mr Terence Mills, Professor of Applied Statistics and Econometrics at Loughborough University; and Mr Geoffrey Wood, Professor of Economics at Cass Business School in the City of London.

Initially, investors looked for currencies as `safe havens'. However, currencies, including the safest of them, are subject to economic and political risk and to unpredictable political manipulation. Investment in gold was one way to hedge these risks.

The economists referred to data from 1971, the date of the breakdown of the Bretton Woods system, until June 2002 to examine the relationship between gold and exchange rates with particular attention to the hedging properties of gold during economic and political turmoil.

The key findings are that the dollar gold price moves in opposition to the dollar price of currencies such as the British pound, German mark, Swiss franc and Japanese yen. If the dollar appreciates, the dollar gold price falls. A fall in the dollar relative to the other currency produces a rise in the gold price.

"Despite repeated periods of economic turbulence between 1971 and 2002 gold was, throughout, a consistently good protection against the exchange rate fluctuations this turbulence produced," the research pointed out.

"Gold acquired the attributes of a monetary asset for a wide variety of reasons, many of which are discussed in this paper, but underlying all these reasons is the fact that gold cannot be produced by the authorities who produce currencies. This means that those who can increase the supply of money, and therefore from time-to-time debase its value, cannot by similar means debase the value of gold," the study said.