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FE Adviser Fund Index

“Gold? Yellow, glittering, precious gold?…
This yellow slave
Will knit and break religions, bless th’ accursed,
Make the hoar leprosy adored, place thieves,
And give them title, knee and approbation
With senators on the bench.”
Timon of Athens, Act IV Scene III

Even in condemning gold, Shakespeare was acknowledging the unique place gold has occupied between a physical manifestation of power while touching somehow on the ethereal.

It appears little has changed in our fascination. In August, the gold price hit an all-time high of $1881 an ounce, sending gold bugs into a frenzy over the prospect of it crossing $2000. In the event, gold has retreated to $1548 an ounce, a fall of over 17 per cent from its peak.

The precipitous falls have lead some fund firms to issue warnings about the value of using gold as a buffer against the current round of macroeconomic uncertainties. Eden Financial, Fidelity Worldwide Investment and Skandia all chose to warn investors that, at current prices, they do not see gold as a safe-haven asset.

AFH Independent Financial Services head of research Graham Toone says: “We can see the argument it can be used as cover for geopolitical risk but not necessarily as an inflation hedge. The speculative forces out there mean when it starts to rise there is a compounding effect.”

This fear that gold may have overshot last year appears to form the basis for many of the arguments against investing. At the core of this, however, is the fact that the drivers of the gold spot price are not simply the underlying supply and demand dynamics but a complex web of factors, including geopolitical risk, central bank demand and the rise of exchange traded funds.

It is complex to work out how much of the demand is a temporary rush to safety and how much reflects structural shifts.

Not all panellists view the recent surge in interest as negative . Chelsea Financial Services managing director Darius McDermott says: “In this climate of uncertainty, having something in real assets such as gold has a place. There has been substantial demand from the ETF market, which has added volatility, but there is a case to be made for it given emerging market demand.”

Over the past 12 months, global demand for gold has grown by 16 per cent, according to the World Gold Council. Central bank demand accounted for 80.8 tonnes while China increased its investment by 10 per cent.

These figures help to underline a more profound shift in economic growth rates between East and West but whether they suggest a longer-term rise in absolute demand is another matter.

Data supplied by FE


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