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Brian Tora: Should we follow the yellow brick road?

I have never been much of a gold buff. It does not pay a dividend and arguably costs money to hold, although synthetic exposure can now more easily be acquired.

However, I accept it’s an essential part of many investors’ portfolios, not that this has done it much good of late. 

Having peaked at more than $1,900, gold bullion flirted with $1,300 a week or so ago. The extent of the fall would have been ameliorated for sterling investors but given the pathetic performance of the pound, it is quite a setback. 

A fair bit of the fall came in a few short trading sessions earlier this month. That part of the commodity’s setback is easier to explain.

Many hedge funds holding the yellow metal were doing so on borrowed money so, as the slide gathered momentum, margin calls resulted in forced selling. The result was the biggest fall in the price of gold for 30 years.

Many investors will be asking whether this trend will continue or if a buying opportunity has been created.

Gold is the ultimate fear hedge. People own it because they trust it more than paper money. Governments hold it as a reserve against tougher times, which may account for its fall out of favour. Over-borrowed nations could be turning to their gold reserves to plug up their balance sheets.

Rumours that Cyprus might have to liquidate some of its gold holdings may have triggered recent panic selling.

However, a more likely reason for gold falling out of favour could be the slowdown in China and its tougher stance on corruption. This is leading to fewer bribes being offered and officials are more wary at how they display their power.

And while growth in China remains at an impressive 7 per cent-plus on an annualised basis, there are clear signs that the focus of attention is now on value-added products, rather than the basic, commodity-absorbing industries of the past.

Gold may not be directly affected by this change in approach but there is little doubt that other commodities are suffering and gold could be swept along in the tide.

Certainly, many metals have been adversely hit by the activities of hedge funds in this area, with their propensity to leverage their funds. It does all make you wonder how suitable an investment gold is.

It is important, too, not to confuse the behaviour of the metal price with that of the companies that extract it from the ground. To say there is little correlation between the two is stating the obvious. 

Having been present at the birth of what is now the BlackRock Gold & General fund, I recall the insistence of the inaugural manager – the late Julian Baring – that ‘General’ be included in the title, lest he did not wish to buy gold shares.

In 1974, Jim Slater, revered as a stockmarket operator, despite the fact we were in the worst bear market of the 20th century, described the ideal portfolio as comprising tins of baked beans, shotgun cartridges and gold coins.

With oil going through the roof, rampant inflation and industrial unrest at home, society felt at breaking point. I hope we never return to those conditions but, even so, it is wrong to write off gold just yet.

Brian Tora is an associate with investment managers JM Finn & C


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