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Gold standard

Commodities Will Henley gauges analysts’ views on the investment prospects for gold as it reaches a 27-year high

The price of gold has shot through the $700 barrier and is on course to have doubled since 2004. Investors have flocked to the precious metal in recent months as a means of diversifying away from volatile equity investments but as the price of yellow metal reaches a 27-year high, the question begs, is all that glisters gold?

Analysts attribute its strength to simple supply side economics. Demand is strong, with production unable to keep pace with the appetite of consumers in Asian countries such as India, for jewellery. Demand from central banks, too, in Russia and emerging market countries such as China has held the price high, explains Hargreaves Lansdown head of research Mark Dampier.

He says: “Gold is seen as a good store of value. It has been used in the same way for about 4,000 years going back to the Egyptians and Aztecs.”

Dampier, who invested in the Merrill Lynch gold and general fund for the first time last year, says he would not be surprised to see the price of gold continue to rise through the $1,000 mark “potentially within the next couple of years”.

BlackRock portfolio manager Evy Hambro runs the MLIIF world gold and the MLIIF world mining fund and says gold is the only high-value commodity which has not reached a new all-time high in recent months. Gold is a “wonderful diversifier”, he says. “It has no correlation with any other financial asset, except a negative correlation with the US dollar.”

Hambro says: “The alltime high of gold was $850 in 1980. If you look the price of copper and platinum, the highs were last year while the high for oil is now. My view is gold is on the catch-up. The fundamentals are strongest they have been in my career.”

Dampier says that to capitalise on gold, investors might buy into an ETF or a natural resources fund. But he cautions that the price may dip in the immediate term and says the best purchase opportunity might be in a couple of months.

Chelsea Financial Services managing director Darius McDermott is cool on the value of gold as a diversifier, given its “susceptibility for volatility”, although he does not believe demand for gold will taper off yet.

Hambro defends gold on this point by distinguishing between gold equities and bullion. He argues that the volatility of gold is pretty low compared with most equities. “Gold equities can be very volatile,” he concedes.

Dampier suggests focus on volatility may be misplaced as gold is essentially a growth asset.

He says: “Gold may not be the best diversifier. Sometimes it might be an insurance policy but each time the markets have fallen, gold as a commodity has fallen as well. But the argument in buying gold now is more that it will make you some money. You buy it because you think it is going up, even if it is volatile.”

But buying into gold now, given its current high price, may not represent a sound investment decision, thinks Options for Women managing director Liz Lyke.

She thinks the asset class and risks associated with it are perhaps too specialist for the ordinary UK investor.

She says: “People look to gold as an alternative to the equities market for security. But if the equity market turns around, they may find they need not have gone in for gold. The problem is it is a specialist area not familiar to the run-of-the-mill investor.”

With its absolute returns and retention of capital value, many analysts look to cash as a decent alternative – even if returns in the short term are lower.

McDermott says: “In the short term, cash is a good bet as it is a big diversifier.”

Dampier argues that if the aim of the investor is to safeguard capital in an asset class not correlated with any other, he or she would be wisest investing in cash.

He says: “It ticks my box. As an alternative to gold, it is the only asset not correlated with anything else. Everyone should have cash as it will be there when you need to call on it.”

Lyke sees commercial property as one other alternative, in addition to more cautious acquirements such as corporate bonds or national savings. She says that although commercial property has probably reached its height now, it may not be too late to benefit from rental income through investing in bricks and mortar as opposed to property shares.

Lyke says: “If the stock-market drops substantially as it did in August, it does not have an impact on the value of my office premises. So if you do diversify your portfolio, you would want something in commercial property.”

Timothy James & Partners director Robert Guy says gold purchases could, in the short term, become a shrewd strategic investment. But it does not necessarily work as a long-term tool for diversification. He says the biggest downside to gold is that it generates no dividend or interest income compared with bonds, cash or other assets.

He says bonds, although they have performed relatively poorly, might represent a better asset as interest rates cool off.

Guy says: “It has been very difficult to make money in bonds the past three or for years. That situation is changing now.”

Guy advises against trying to pick the best asset class with allocations in a wide pool of classes.

But he says: “There is nothing wrong with gold. I have had a client who has been in gold for two years and has made over 140 per cent return on his investment, which is extraordinary. I would consider it a strategic hold though rather than a long-term natural diversifier.”

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