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Bling it on

The metal gurus are predicting the gold price could double, says Matt Davis

Gold prices hit a 25-year high last week at $544 an ounce following rumours that the Chinese government may be about to increase its gold reserves.

Bullion merchant Baird & Company trading manager Jeremy Kyd says rumours about the Chinese wanting to reduce currency risk are undoubtedly responsible for the latest price rise and he sees it moving even higher. Kyd’s firm sells gold to companies and private investors in the form of bullion, sovereigns and gold bars.

Gold has been one of the top-performing asset classes, rising by 20 per cent over the last three months, and Kyd says there is no reason why prices should not double from here to reach $1,000 an ounce. He says there has been a lot of interest from hedge funds but the outlook is also more volatile because of this.

“Normally, gold producers will be hedging the price of production but they are now selling at current prices, suggesting they are betting on prices going even higher than they are now,” he says.

Research carried out for the World Gold Council at the end of 2005 suggests that gold is a better indicator of the direction of inflation than the oil price and that investors are increasingly using gold as a hedge against global inflation.

Prices have risen significantly over the longer term from $360 an ounce in 2003, due largely to political tensions in the Middle East.

World Gold Council managing director of investment research Katherine Pulvermacher is not allowed to make predictions for the future but says if one’s view is that the factors behind the recent price rise are likely to persist over the next two to three years, then gold remains a good tactical investment. However, she cautions against trying to capitalise on short-term movements in the market.

“Our concern is that the primary reason to invest in gold should not be for a quick flash in the pan but as a diversifier against the volatility of other investments,” she says.

Bestinvest business development manager Justin Modray says it is very rare for UK investors to approach IFAs asking for exposure to gold.

He suggests this is a cultural issue, pointing to India as accounting for 25 per cent of global investment in the commodity, largely through personal ownership of jewellery. When the markets rose in early 2003, many Indians sold their gold and took profits.

Modray says: “It is expensive to buy gold as jewellery in the UK as you pay a premium for the retailer, the design and workman-ship. We generally encourage clients to buy gold in the form of equities as a diversifier against other investments.”

Merrill Lynch gold and general unit trust manager Graham Birch explains that equities tend to have geared exposure to gold prices, meaning that price rises will be multiplied in the performance of the fund although there is equal risk on the downside.

He says the late 1990s were a dire time to hold the fund as gold equities fell victim to the enthusiasm for soaring technology markets but, over the five years to January 10, the fund is up by 390 per cent.

Birch says his fund is not the place to put an investor’s entire life savings and that it is more typically held as a diversifier by more experienced investors who understand market volatility. As an example of the fund’s volatility, he says gold shares rose sharply in mid-2005 following the French non vote to the EU constitution, as people lost confidence in the euro as a stable currency. Other drivers remain in force and he remains upbeat.

“Looking at the drivers, if the Chinese were to boost their reserves from 2 to 3 per cent, it would not raise too many eyebrows. At the same time, the Middle East central banks have plenty of dollars from the high oil price and there is renewed interest from institutional investors in using gold as a diversifier. Investors willing to stomach volatility can get some great returns,” says Birch.

Plan Invest managing director Michael Owen believes supply and demand issues will continue to drive up the gold price, subject to significant corrections from time to time. For this reason, he suggests investors should try to buy at a dip or make monthly contributions to iron out the risk through pound-cost averaging.

He says: “If someone is keen to go for just gold, then the Merrill Lynch fund is a good option. For private clients, I would recommend a commodity fund diversifying gold with oil, gas, copper, precious metals and so on. JPM natural resources is a good fund but it will be volatile while Graham French’s global basics fund at M&G is a safer option as it tends to invest in blue-chip stocks to gain exposure.”

Modray doubts whether private investors will be enthusiastic about gold this year despite strong prospects. “One of the key attractions is that gold is a safe haven and a tangible, physical commodity. With markets relatively


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