ITALY- The treasury of Italy’s regional banks (banche popolari) has unveiled plans to issue gold index bonds – bonds with returns linked to the price of gold. The bonds will be aimed at risk-averse investors, and will carry a rating of AAA or AA+, but some market officials question whether gold will ever be a popular asset class among investors.

In the current uncertain global economic environment, gold, the definitive defensive instrument, should be seeing increasing popularity, but many investors do not consider it as an asset class.

As a result of its lack of appeal, various gold-linked products have been launched in order to woo investors, but attempts have been short-lived. Although gold has seen a variety of investors turn to it as an alternative investment this year, many feel that the returns are disappointing.

“Given the environment of global terrorism, falling equity markets, credit spreads etc. the market was expecting to see increased interest in gold, but it appears many investors are not buying the story of gold as a safe haven investment. It has underperformed people’s expectations, and we just have not seen the breadth and scope of investment that we anticipated”, says a gold trader at Deutsche Bank.

Lack of interest in gold has been attributed in part to the auctioning off of gold reserves by central banks. In the general shift of opinion away from the idea of gold as a reserve asset, the Reserve Bank of Australia, the Swiss National Bank and the Bank of England have all auctioned off gold, which, say traders, undermines the value of the asset. Furthermore, gold’s difficulties appreciating, combined with its illiquidity do not encourage investors to buy into the asset.

But Graham Birch, manager of MLIM’s gold and general fund, believes that now is a good time to invest in gold. Investment market uncertainty, combined with the negative outlook for the dollar has enhanced the position of gold as part of a large portfolio.

Says Birch: “gold is a superb hedge against equities, and frequently does well when other assets do badly. Gold has a low correlation with stocks and shares, and also tends to do the opposite of whatever the dollar is doing.”

“Gold also looks cheap when measured against the Dow Jones Index – looking at the number of ounces of gold required to buy one unit of the Dow Jones”, says Birch. “Is now the right time to buy gold shares? We think so.”