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Market turmoil continues

Investors have turned to gold, one of the oldest stores of value, as global stock markets remain ravaged by massive falls

The financial markets around the globe are reeling in shock, resulting in massive falls on stock markets around the world. That tried and trusted measure of safety, gold, has hit $1,700 per troy ounce. Not so many years back, gold was in the $200 to $300 per troy ounce bracket. Thousands of investors have bolted into gold simply because they don't trust paper, whether currency, share certificates or bonds.

Dismissed as a 'barbarous relic' by Gordon Brown, who sold off most of Britain's gold reserves at around the $250 per troy ounce when he was Chancellor of the Exchequer, gold offers a safe haven allied with future capital gain. Investors are prepared to bid gold ever higher despite the fact that it yields no income and comes with storage and insurance costs. History is on the side of the gold bugs – gold has proved a reliable store of value over the last 10,000 years. Paper currencies and share and bond certificates have a history going back just 400 years.

The reason why investors worldwide are panicking, and have some horrendous times to come, is that the US has seen the US dollar, the world's reserve currency, demoted to AA rating by the credit agencies of the world. The biggest companies in the US have been downgraded from AAA rating to AA along with the dollar and the US Government. Growth in the US is almost negligible, as it is in the UK and now Germany. The Bank of England, which was pressing for an increase in interest rates to 5 per cent by the end of this year, has stuck at the 360-year low point of 0.5 per cent. There is speculation in the market that the Bank will leave the latter rate unchanged until 2013 – bad news for savers who are getting derisory returns on their savings. 

The only bright spot in the world's economy is China, which is enjoying a 9 per cent growth rate with pundits speculating that the Chinese yen could replace the US dollar as the world's reserve currency.

While all shares have been carried down in the daily panic in the UK stock market, savers seeking safety continue to aim for pharmaceutical stocks on the rationale that, come what may, a second recession or no, people continue to fall ill.

The dividend yield on solid pharmaceutical shares is now up to 6 per cent – double what you can get for your savings in a bank or building society deposit. The big pharmaceutical companies are massive cash generators and have treasure chests of cash ready to boost their dividend, buy in shares to inflate the price of the remaining shares, or make astute acquisitions of promising pharmaceutical or biotechnology companies with healthy drug development lines. 

AstraZeneca to bid for Shire?
AstraZeneca is woefully at risk with some of its blockbuster drugs approaching patent expiry and facing stiff generic competition from cheap drug suppliers. Shire Pharmaceuticals, the UK's third biggest pharmaceutical company, would fit the bill nicely. Any bid by AstraZeneca for Shire would quickly be followed by a second, or even a third, bid from other UK pharmaceutical companies or from foreign counterparts.

Separately, AstraZeneca is aiming to hand a further £615m to shareholders following the sale of its dental implants business. The money from the sale will top up an existing £2.5bn fund, which is to be used to buy its own shares.

Malcolm Craig is a freelance financial journalist and author of 15 books on successful. He is one of the country's most respected investment commentators.

16th August 2011

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