F&C’s Scott: Hang on to your gold

Gold will remain the best real asset play for investors if central banks continue to print money and risk debasing their currencies, said Ted Scott, director of global strategy at F&C.

Investors have flocked to the safe haven commodity amid weak economic growth prospects, leading to fears it could be due a correction. However, Scott sees more upside in the asset class as governments continue stimulus measures, while other asset classes, such as currency, are set to weaken.

"The rise in the gold price has been driven by a confluence of weak economic growth, massive monetary expansion (that the ECB has recently added to) and fears of a breakdown in the global financial system," said Scott.

"With the debt crisis becoming so difficult to resolve and central banks threatening to debase their currencies via the excessive issuance of paper money it has not only increased the attraction of gold as a safe haven but undermined that of the US treasury bonds," he said.

According to Scott, if central banks successfully restore economic growth and cut debt while stemming inflation, gold could see a sharp correction. But Scott sees this as unlikely and said the asset class should continue to form an integral part of a diversified portfolio.

"The more likely scenario is that the deleveraging process for both the private and public sectors has much further to go, and in the meantime central banks will continue to pump the financial system with more liquidity," he said.

"As it becomes clear the risk of currency debasement is rising, the attraction of real assets will grow, and within that category gold remains the best play," he added.

The failure of "fiat paper money" currencies has strengthened the investment case for gold, according to Scott. The term defines any money declared by a government to be legal tender.

"Since governments have a monopoly on the issue of money (via bank notes printed by the central bank) there have been times in history when currencies have become unstable due to the excessive issuance of paper money.

"Put simply, too much money chasing too few goods will result in higher prices that will result in increased demand for an asset that retains its value of high inflation, like gold," he added.

Although there has been modest improvement is some economic data in recent months, Scott sees general levels of growth as disappointing, with the UK and Europe facing the serious threat of recession, despite further quantitative easing.

"The response is likely to be even more printing of money, meaning the risk of eventual high inflation and currency debasement will grow accordingly. All this will add to the lustre of gold as an asset because it is the only major asset that does not represent somebody's obligation to pay.

"There is a finite supply of gold in the world where the supply is only growing at a small rate as new stock is mined each year. This means it cannot be debased like a paper currency where the potential supply is limitless," he said.