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Diversification is key to making the right size of Gold Investment...

was great for gold and gold investors, but it will shine more brightly still in 2010 according to the World Gold Council.

The non-profit, mining-backed research and marketing body believes Gold Investment demand in particular has much further to go.

Here Jason Toussaint, the WGC's New York managing director of Exchange Traded Gold – which manages and promotes the World Gold Council-backed exchange-traded gold products worldwide, including the world's second-largest ETF product, the GLD Gold Shares Trust – speaks to Hard Assets Investor about why.

Hard Asset Investor: In your most recent report on Gold Demand Trends, the World Gold Council identifies two key drivers of the gold market in 2010: higher Gold Investment demand out of the US and Europe, and higher jewelry demand out of India and China. Which of these two factors is the stronger influence on today's market?

Jason Toussaint: If we look at historical figures, we see that jewelry consumption leads all sectors, in terms of tonnage of demand. That will continue going forward, and jewelry would have the higher impact.

That said, it might be worth noting that when we speak about the jewelry market in the non-US or the non-Western markets, the differentiation between a jewelry purchase for adornment and for investment is very great. It's very difficult to say that someone in the Indian gold market who's purchased gold jewelry is doing so exclusively for the jewelry aspect and not for investment, because there's a very liquid two-way market in that around the world.

The bottom line is, and the common thread here is, gold is seen as a long-term store of wealth, which is keenly important in today's markets.

HAI: We've heard a lot about China and India's appetite for gold jewelry. But are we also seeing any recovery in jewelry demand in the US and Europe?

Jason Toussaint: Absolutely. I think the larger impact on jewelry demand is generally volatility and the pace of change in the Gold Price, and not necessarily the notional figure at that point in time. In other words, we typically see when there's a steep run-up in the Gold Price, that tends to suppress jewelry demand. And when we have a leveling out, or a less rapid increase in the Gold Price – as we enjoyed in the first quarter – jewelry demand tends to come back. And that's absolutely what we saw this past quarter.

HAI: We've seen much weaker Gold ETF buying this quarter on a year-over-year basis. Granted, 2009 was an exceptional year, where investors rushed to ETFs in record numbers. So is that the only reason we're seeing a decline in Q1 2010? Or are there more factors at play here?

Jason Toussaint: Well, it's very difficult to point to one factor and say that that is the exclusive factor behind gold ETF demand. But I think we did see somewhat of a slowing of interest. And what could have happened is rebalancing activity. A lot of investors rebalance on a tax-efficient basis by selling gains and offsetting them with positions that have losses, and gold was a very strong performer in 2009.

Maybe people and investors said, "We're done. We want to see what happens." But particularly toward the end of the first quarter, and certainly very recently, there was another dramatic uptick in demand for Gold ETFs.

So I think we're seeing a large paradigm shift in the view of gold by investors from what used to be a strictly safe-haven view, and using it as a short-term tactical portfolio tool, to a much more longer-term focus on portfolio diversification and wealth diversification. Investors are generally holding their gold for very long periods of time. We hear from the investment advisory community that most advisers who have recommended gold for their clients are recommending a 5% allocation. Now as an organization, we don't recommend gold in any percentages; this is simply what we're hearing from the marketplace.

HAI: But what happens when the global economic picture starts to improve substantially? Do you think people will still view gold as that long-term portfolio asset, or will investors switch back to a tactical view once the markets appear to improve?

Jason Toussaint: I think that it will be continuously viewed as a strategic asset. It's not as if it's a binary question. Gold is generally viewed now as a buy-and-hold type of investment asset. And I think what lends the biggest backdrop to that is the events of 2008. Investors were caught so off guard, and there was such a huge cyclical decline across all markets – but gold was one of two asset classes among all of them that had positive returns that year. The key message is, if you get it wrong, and risk hits you on the downside, then gold is there to preserve at least a portion of your portfolio's wealth.

I like to tell investors that when gold is your No.1 portfolio asset, that's the time when you need it to be. When was the last time you assembled a portfolio and said, "Every one of these positions is my No.1 performing asset"? It doesn't work that way. The concept of diversification is still key.

So I think if we look at the peak in mid-2007, there was a general laissez-faire approach to market risk, because we had it good for so long. In the seven-year equity bull market from 2000, there was a tendency to take portfolio risk for granted, and to not understand that returns are generally normally distributed.

HAI: Do you think investors, as a whole, have reset their expectations of risk and return as a result of the crisis?

Jason Toussaint: Absolutely, and particularly on the institutional side. What is the fundamental purpose for defined benefits plans? It's to ensure that they have assets to fund future liabilities. And gold, in particular, has a great way of protecting wealth in periods of negative surprise.

Gold is the type of portfolio asset where you set it and forget it. I like to say, the time to buy insurance is not when your kitchen is on fire. That's the important point. If we went long when assets are rising, and then went back to cash or some short-term holdings while they fell – unfortunately, most investors don't have the luxury of day-trading their portfolios. Certainly pension funds don't.

So from a strategic, long-term asset allocation perspective, think of it as a policy benchmark for a pension fund or an institutional investor. Gold Investment does have a place in there.

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