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Should you buy gold at $1,200 an ounce?

Gold has been out of favour for years but some say it is time to re-enter.
November 21, 2014

The gold price has been on a downward trajectory since its peak of more than $1,800 (£1,147.74) an ounce in 2011, and it now trades at less than $1,200 an ounce. However, some analysts and investors argue that now may be a time to buy into the precious metal.

Tom Beckett, chief investment officer at Psigma Investment Management, expects the gold price to rise because of inflation and instability. "We believe that commodity prices are trading towards their lows and that the disinflationary forces will dissipate," he says. "The next support for Gold is the continued frenzied buying that is taking place by the consumers and central banks of emerging nations, particularly in Asia. Chinese demand will reportedly be 2,000 tonnes this year, equivalent to the whole annual output of the gold mining industry. And we do not expect any net selling from central banks, so their actions should be a continued prop for the gold price."

Mr Beckett also points out that gold is a useful diversifier in portfolios, as it has no obvious positive correlations with other asset classes. "With sentiment towards the metal at extremely bearish levels, it is a question of when and not if gold recovers," he adds. "In the short term the price can certainly fall further, but looking further out we expect gold to gain."

Nitesh Shah, research analyst at ETF Securities, says that if you want something as a hedge in a diversified portfolio then at the current low price, now might be a relatively good time to go back in. "Gold tends to spike during extreme events so holding it helps reduce the impact of these on cyclical assets."

He adds that as the price of gold is also close to the costs of marginal production and as some mining companies are not profiting, there could eventually be a cut back in supply which would then benefit the gold price.

Switzerland is holding a referendum on 30 November on whether the Swiss National Bank should increase its allocation to gold to at least 20 per cent, in contrast to its current allocation of less than 8 per cent. If this is passed the bank will have to buy more gold which could considerably increase the price. However recent opinion polls show only 44 per cent in support, and a majority is needed to pass this.

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However, there are a number of risks to investing in gold, and some think you should avoid it.

Mr Shah points out that the gold price is highly correlated to real interest rates, especially in the US, and if these rise it could have a downward effect on the gold price. But he thinks that to a certain extent these rate rise expectations are priced in.

An improvement in economic conditions, as is happening in some parts of the world, could be detrimental to the gold price as investors feel less need for a hedge. Ben Willis, head of research at wealth manager Whitechurch Securities, says that they have no exposure to gold, and foresee numerous headwinds for this the non yielding asset, particularly as investors and businesses become more confident and interest rates begin to rise.

He says because US Quantitative Easing has ended the dollar is strengthening and this has put pressure on the Gold price. "Rampant inflation has not materialised, in fact, there are bigger concerns over deflation at the moment and so the allure of Gold as an inflation hedge is just not required," he adds.

Gary Reynolds, chief investment officer at wealth manager Courtiers, adds that demand for jewellery, which accounts for a large proportion of gold sales, is falling.

 

Best gold funds

There are two main ways to get exposure to gold - investing in it directly or buying shares in gold mining companies.

You are already likely to have exposure to some gold shares if you have mainstream equity funds. Patrick Connolly, a certified financial planner at Chase de Vere, says that specific exposure to gold shares is most suitable for aggressive investors who want to take a punt on the low valuations of gold mining shares with a small proportion of their overall investment portfolio.

He adds that if you add a specific allocation to gold, then this should not account for more than 5 per cent of your portfolio. To spread risks he suggests investing regular premiums rather than lump sums.

Mr Shah says that funds which offer a wide variety of gold mining shares give diversity and as these have derated over the past few years may offer value, as well as the potential for equity market upside.

We include Investec Global Gold Fund (GB00B12B5S05) among our IC Top 100 Funds. The fund has outperformed its comparative index, Euromoney Global Gold, over one, three and five years on an annualised basis, albeit making negative returns. The fund invests globally, primarily in the shares of companies involved in gold mining and related derivatives (72 per cent of its assets). It has an ongoing charge of 1.62 per cent.

But even if the gold price is doing well, if there is a problem with an individual gold mining company it will not do well. And when equities overall underperform, so will mining shares, so if you want a hedge against extreme events then you need direct gold exposure.

The easiest way for private investors to get direct gold price exposure is via an exchange traded commodity (ETC). We include three in our IC Top 50 ETFs.

Source Physical Gold ETC (SGLD) aims to provide the performance of the spot gold price through certificates collateralised with gold bullion. The fund has tracked the gold price well and has a very reasonable charge of 0.29 per cent.

ETFS Physical Gold ETC (PHGP) is large ($4.16bn in size), liquid and transparent, and is backed by physical allocated gold held by HSBC Bank USA. It has a charge of 0.39 per cent.

Gold is priced in US dollars which means that UK investors face foreign exchange risk. But db Physical Gold GBP Hedged ETC (XGLS) has a currency hedging mechanism to minimise the Sterling/US dollar exchange rate risk. However, on top of the 0.29 per cent management fee investors have to pay a 0.4 per cent foreign exchange hedge fee.