Almost 200 people attended our recent afternoon conference devoted to investing in gold, hearing presentations on the supply-demand background, various ways of buying exposure to the yellow metal, and an insight into the best times to buy and sell.
Gold has always captured investors' imaginations, and its recent price performance has resulted in an upsurge of interest. Over the decade to the end of 2009, it was the single best-performing asset class, handsomely beating shares and property. At the same time, investment in gold has become significantly cheaper and easier thanks to innovations like exchange-traded commodities and bullion-buying websites.
The fundamental case
Even before western governments started to effectively debase their currencies via huge expansions in the money supply, there were plenty of fundamental reasons to buy gold, according to Marcus Grubb, managing director of research at the World Gold Council. Mine supply has stagnated for years and there have been few major new discoveries. Thanks largely to the ‘Washington agreement’, net sales of gold from central banks have declined from an average of 444 tonnes a year in the five years from 2004 to 2008 to just 44 tonnes in 2009. Most recently, central banks have been buying gold – possibly in a bid to diversify their reserves away from dollars. Gold demand is seasonal and price-sensitive, but emerging middle classes in China are buying ever greater amounts of jewellery, and there has been a big increase in gold buying from investment sources, particularly providers of exchange-traded funds. ()
The rise of ETCs
Exchange-traded commodities (ETCs) were pioneered in the early years of the decade as a simple and cheap way of tracking the gold price, explained Neil Jamieson, head of sales at ETF Securities. Since then, assets under management within ETCs have grown to over $17bn at ETF Securities alone. Of that total, around $4.5bn is accounted for by Gold Bullion Securities, the group's original gold trading product, which launched in 2004. Like its stablemate ETFS Physical Gold , it is backed by physical gold held by a custodian bank and audited by an independent metals inspector. Worldwide, holdings of physical gold to back ETCs now stand at around 1,732.5 tonnes - more than those held by the European Central Bank. ()
| GOLD FACTS |
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• All the gold mined since antiquity would weigh about 163,000 tonnes. That's just about enough to fill a medium-sized office block. • Indians are the world’s most avid gold traders. Indian private holdings of gold equate to almost twice the Federal Reserve’s inventory. • At current prices, a standard 12kg ‘good delivery’ bar is worth in excess of £300,000. We had one on display at the conference! |
Gold as money
According to James Turk, founder of GoldMoney, gold is more than just another asset class. It is money, and the only viable way to protect your wealth from erosion via declining currencies and inflation. To illustrate this, he pointed out that the gold cost of a barrel of oil is around the same now as it was in 1950, whereas in sterling or dollar terms it is vastly higher.
In the medium term, the price of gold could go as high as $8,000 an ounce as, in Mr Turk’s view, the US stands on the brink of a bout of hyperinflation - not of the Weimar kind, but of the Argentine kind. The difference is that in Weimar Germany, and in Zimbabwe, inflation was visible as they were cash economies. Argentina's inflation of the 1980s and 1990s manifested itself via the constant revaluations of the currency in people's bank accounts; pesos were converted in australes, which were themselves converted to new pesos. With US federal spending soaring and tax receipts falling, the federal deficit is heading ever higher and this will only be reduced in real terms by letting inflation rip. (Download James' presentation)
Own the real thing
For these reasons, there’ll always be some investors who want the comfort of owning their own real gold. In the past, buying gold was a convoluted and expensive process, and storing it securely brought another set of challenges – and costs. That’s why Jason Cozens and Declan Cosgrove set up goldmadesimple.com. Having made substantial sums from online media businesses, the duo were appalled at the obstacles they faced when trying to buy gold online. Goldmadesimple.com allows investors to purchase gold securely online with a transparent cost structure. All the gold bought through the portal is allocated, which means it belongs to the holder only and cannot be lent out by the custodian bank. The gold is stored within accredited storage facilities. Goldmadesimple is different from fractional ownership schemes, where investors own a share of a good-delivery bar. (More information: www.goldmadesimple.com)
When to buy
When’s the best time to own gold? All the time, says Dominic Picarda, associate editor, Investors Chronicle. More often than not, it is negatively correlated with other asset classes, particularly shares, so it’s a good counterweight to have in any portfolio. However, common preconceptions about gold’s value as an inflation hedge are somewhat misplaced. The metal’s performance during periods of high inflation, going all the way back to the American revolution, has been patchy. Ironically, it has turned in consistently better performance during deflationary periods. These observations carry the caveat that, for much of its history, gold was effectively money – because many currencies were formally pegged to it. Looking at gold’s recent price performance from a charting point of view, near-term price targets are clustered around the $1,500 per ounce level, although the highest comes in at almost $2,000. In the 1979-81 gold boom, the price reached over $2,300 in today’s money – and while today’s gold bull run has gone on almost as long as previous ones, it has not yet matched earlier booms for price performance. As to timing purchases: statistically, gold tends to perform better in May, September and November, and in years three and eight of the decade. If you want to buy when everyone else isn’t, watch the open interest data from the Commodity Futures Trading Commission (CFTC – www.cftc.gov), as they’ll tell you when speculative net long interest is relatively low. This has often been followed by outperformance. ()
