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For additional information, contact:
Richard Scott-Ram, Portfolio Strategist World Gold Council 444 Madison Avenue, Third Floor New York , NY 10022 Tel: 212-317-3840 Fax: 212-688-0537 Website: www.gold.org. |
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The World Gold Council is a non-profit association of gold producers worldwide, with headquarters in Geneva and offices in major markets around the world.
The Council’s mission is to maximize the offtake and retention of gold by influencing positively the attitudes and behavior towards gold of actual and potential public and private sector holders of gold. |
The “Year 2000” problem (Y2K) already is the main preoccupation of information-technology departments of corporations around the world. As the millennium approaches, it will increasingly preoccupy policymakers and the public as well. The Y2K problem exists because most computer systems have been programmed to record and manipulate dates with only the last two digits of the year. For instance, 1999 is represented as “99”and 2000 is represented as “00.” But “99” is higher than “00,” and most computers cannot identify the year 2000. Once January 1, 2000 is reached, most computer systems will produce incorrect results unless the problem is corrected. Nobody really knows what will happen at the time of the date changeover. Nevertheless, the millennium bug has the potential for adversely affecting many activities in the international payments system. Investors need to keep informed and develop contingency plans that can be put in place in a timely and cost effective manner. Portfolio managers wishing to hedge against the uncertainty surrounding the millennium bug may want to consider investing in physical gold bullion for the following reasons: Insurance Against Stock Market Trading Breakdown: Unresolved millennium bugs could result in the suspension of trading in stock markets. (A “no trading” phenomenon also could result from telephone and banking systems going out of order as a result of Y2K difficulties.) But gold is a tangible asset; its existence cannot be erased by computer error. Insurance Against Equity Value Losses: Even if the world’s stock markets continue to function smoothly beyond January 1, 2000, what valuation should investors place on stocks? There are two concerns. First, a company’s earnings could be affected adversely by year-2000 related costs. Second, there is the possibility of post year-2000 lawsuits lodged by clients or shareholders incurring losses resulting from year-2000 failures. Insurance Against Commercial Banking and Brokerage Dislocations: One of the problems that commercial banks could experience in anticipation of Y2K problems is the possibility of a bank run. In the event of a bank failure, it is conceivable that customers could suffer delays in acquiring their funds from the Federal Deposit Insurance Corporation (assuming it does not have its own Y2K computer problems to deal with). Brokerage company accounts are insured up to a level of $500,000. If a brokerage house collapses as a result of Y2K problems, it is not clear whether the customer would receive compensation in the form of cash or stock certificates. Reduction in Portfolio Volatility: It is possible that portfolio managers will face more volatile financial markets and higher risk premiums for equities. Accordingly, investment in gold becomes an attractive strategy as it reduces a portfolio's overall volatility. This result stems from the fact that gold is negatively correlated to other asset classes. Insurance Against Counterparty Risk: Investments in paper assets involve counterparty risk; their viability depends upon the creditworthiness of the issuer. Gold, on the other hand, is a tangible asset that does not depend upon any government's or corporation's promise to repay. Birth of the Eurocurrency: The process of creating the eurocurrency now underway may add to the uncertainties surrounding the Y2K problem. These could remain unresolved in the commercial banking sector by the beginning of the next millennium. It is hard to imagine how sufficient resources will be available for the world's commercial banks to carry out the computer work necessary to cope successfully with both the euro and new millennium problems. |
