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Mon 23 Feb 2009 10:16 PM

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Hunger for gold-backed securities continues

Gold-backed securities seen as store of value during global economic turmoil.

Voracious hunger for gold-backed securities from investors looking for a shelter from recession should more than compensate slower jewellery buying from hard-up consumers, a World Gold Council (WGC) executive said on Monday.Gold bullion topped $1,000 an ounce on Friday for the first time in nearly a year and has outperformed other asset classes as investors favour the precious metal as an asset likely to hold value during the downturn.

"While all this uncertainty is out there, investment demand by all accounts is going to sustain gold demand," Rozanna Wozniak, investment research manager at the WGC, told Reuters on Monday.

Investor demand for gold coins, bars and exchange-traded funds continued to surge after posting big gains in the second half of 2008.

"Bar, coin and ETF demand has remained extremely strong so far in the first quarter," Wozniak added.

Gold ETF's are listed and traded like equities, giving investors exposure to the gold market without taking physical delivery. ETFs currently hold record amounts of physical gold, while ETF demand for gold helped the metal's return to $1,000 an ounce.

WGC-sponsored ETF's account for about 85 percent of the market, holding around 1,200 tonnes of gold worth about $38 billion, said the WGC's Owen Rees, who was also present at the interview. Growth has been rapid since the WGC launched its first gold ETF in 2003.

Investors have allocated only a tiny amount of their portfolios to gold, and as risk appetite continues to shrink there is room for bigger flows into ETFs, bars and coins, Wozniak said.

"Gold is just a sliver of the global investment pie," she said. "It's appropriate for investors to put a bit more into gold as an insurance policy against economic contingencies."

Wozniak estimated only 1-2 percent of global investment portfolios were in gold.

Investors were also attracted to gold amid concern about the potential for inflation as central banks finance bailouts and economic stimulus packages, Wozniak said.

"One of the big uncertainties we're facing is what is going to happen now that many government are running such large debt levels," Wozniak said. "They are undertaking quantitative easing and printing money to get out of it. Gold tends to perform well during periods of high inflation."

Even though consumers hard-hit by the recession have cut back on the volume of gold purchased, the value of jewellery demand only fell in two countries last year, Wozniak said. Those were the United States and Britain.

"That's not a bad result given everything that has happened in the global economy," she said. "...(It) is not just perceived as a luxury item. Jewellery buying has a store of value motive to it, too."

In the Middle East, Egyptian demand grew in 2008 while others saw demand fall. The country has a culture of using high-quality jewellery to store value, Wozniak said. (Reuters)

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