August 9, 2008
How Gold Can Turn You into a Winner
By Jeff Salway
As stock markets have fallen, growing numbers of investors have been attracted to precious metal havens
Gold prices reached an all-time high of dollars 1,030.80 an ounce on 17 March, driven primarily by the demand from investors seeking a haven from market turmoil and protection against global macroeconomic risks. On top of that, growing demand from maturing economies such as China and India has coincided with a stagnation in gold production.
As oil prices ease, however, there are fears that gold is heading into correction territory. This week gold prices reached their lowest level in nearly six weeks at about dollars 890 an ounce. Prices should average about dollars 940 for the rest of this year, analysts at French bank Naxtis have predicted, before settling back at dollars 850 next year in the face of rising short-term US interest rates and an easing of inflationary predictions.
The recent fall in the price of oil has reduced some of gold's inflation hedge appeal, but its natural diversification qualities - borne of its low correlation with other assets - still make it attractive in times of market uncertainty.
"It acts most effectively as a hedge against equities, but it isn't a natural inflation hedge at the moment," said Adrian Lowcock, senior investment adviser at Bestinvest. "It is a valuable physical asset in its own right and so is naturally very defensive, whereas companies are subject to trends and themes."
Andrew Wilson, head of investment at Towry Law, concurred, saying: "It has a reasonable track record in correlating with inflation, but inflationary expectations have moved back in the last month. It's best as a diversifier in a multi-asset portfolio, as gold performs unlike any other asset." If you're looking to strike gold, here are the main options:
Gold coins were a popular investment in the 1970s, but gold investors (primarily those with large amounts to invest) are increasingly opting for bullion bars, which can be bought from specialist merchants, such as Baird & Co in London. The problem with owning physical gold is that the costs, such as storage and transport, add up, while it's less liquid than the non-physical options.
Alternatively, www.bullionvault.com offers online gold trading. The site enables investors to buy gold bullion bars in various quantities at any time of day and hold them in vaults in London, Zurich or New York.
"Three decades ago, gold coins were virtually the only option for retail investors," said Adrian Ash, head of research at Bullionvault. "Today, the internet makes gold investment infinitely more convenient and much cheaper."
If you're not bothered about physical ownership of gold, a good bet is exchange traded funds. Sales of gold ETFs, which track the price of gold and trade on the London Stock Exchange, are at all- time highs, as investors seek an inflation hedge.
"ETFs are the easiest way for private investors to access gold and demand for them has been huge," according to Wilson. "With ETFs, you're effectively buying a piece of paper backed by gold, but you're not trading physical gold. Management charges are low, they can be bought any time of day and they are highly liquid."
Globally there has been a growth in the number of ETFs with exposure to gold. In the UK, the Lyxor Gold Bullion Securities ETF and the ETFs Physical Gold track the gold spot price. Both have an annual charge of just 0.4 per cent and are traded on the London Stock Exchange.
While collective investments do not offer the pure exposure of ETFs, they offer the advantages of active management, said Lowcock. "Managers can access gold through a variety of methods, including mining companies, and they can adjust their exposure to it when necessary. However, they do have some correlation to stock markets, unlike pure gold plays."
Perhaps the best-known gold fund is the Blackrock Gold & General, run by Graham Birch. The fund does what it says on the tin, with about two thirds held in gold and gold bullion and most of the remainder in assets including platinum, silver and diamonds. Over the last one, three and five years it has returned 16 per cent, 108 per cent and 155 per cent, respectively. The JP Morgan Natural Resources fund has a similarly track record, although it is more broadly diversified, with just under 30 per cent in gold and precious metals.
But gold is a volatile asset that works best as a non- correlating portfolio asset, so it should account for no more than 5 to 7 per cent of your portfolio.
Share traders can of course buy shares in mining companies. But this is particularly risky as, while gold mining shares should reflect the demand and price of gold bullion, they are also volatile and affected by other factors, from macroeconomic to management and they don't have the diversification of collective funds.
As for the future, prices have fallen 20 per cent since the peak earlier this year, but gold has come a long way in a short period, making further big price rises unlikely. But it has a place in a diversified portfolio, said Wilson. "Where you see gold prices going depends on your view of the economy. If you're very bearish on the economy or inflation, you would be bullish on gold."
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