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Lodes of money

Annie Shaw gets some nuggets of wisdom on whether the gold price can keep on rising or if the yellow metal is likely to lose its lustre.

The nation seems to be in the grip of a mania akin to the California gold rush of 1849. Every time you turn on the TV, there is an advertisement offering to buy unwanted gold. The gold price has soared to an all-time high, as investors have sought a safe haven from stock- market uncertainty.

Even Harrods has got in on the act and has started to sell bullion and coins – although a Knightsbridge department store is hardly the first place you would think of when planning a purchase.

Now certainly seems to be a good time to sell in order to capitalise on the soaring price but is now a good time to buy, or have would-be investors missed the boat?

Howard Bullock, a director of Clear Financial Advice of Billericay in Essex, is wary of gold. He says: “Nobody can predict where the top of this market will be or when it will be reached. The value of gold has increased impressively over the last year and it would be prudent to think that perhaps this market could soon run out of steam.”

His view is echoed by analysts at Belgian firm GoldEssential, who believe that “an unwinding of heavily piled-up speculative long positions is overdue and unavoidable”.

But others consider the market is being driven by inflation fears and the weakness of the dollar and some are even forecasting that a price of $2,000 an ounce is not unachievable.

Credit Suisse head of commodity research Tobias Merath thinks the appetite for gold could power on for some month to come. “The metal will eventually edge higher, as we have a bearish view on the dollar,” he says.

Donald Doyle, chief executive of one of the US’s bigger gold dealers, Blanchard & Co in New Orleans, believes the upward trajectory is not only sustainable but could also be a long-term trend – not least because there have been rumours that the dollar could be dropped as the international currency for oil trading.

He says: “The current rise in the price of gold and its projected sustainability can be attributed to the decline of the US dollar and mounting pressure from the continuing rumble for it to cease being the currency of choice for oil trading. Whether or not that will happen remains to be seen but it does show how fragile the dollar is right now.”

One curious factor about the enthusiasm for gold is the mismatch between the rise in the bullion price and the price of gold mining shares.
Hargreaves Lansdown head of research Mark Dampier points out that traditionally a 1 per cent change in the price of bullion translates into a 3 per cent change in the price of gold shares. He says this is because a rising gold price can lead to even greater growth in profits for gold mining companies.

Over the last three years, however, the FTSE Gold Mines index has risen by 34.1 per cent but the price of gold bullion in dollars has leapt by 67.2 per cent.

“The current rise in the price of gold can be attributed to the decline of the US dollar and mounting pressure from the continuing rumble for it to cease being the currency of choice for oil trading.”

Donald Doyle, Blanchard & Co.

Dampier explains the discrepancy: “Partly, this is due to the fact that investing in shares is riskier than holding physical gold and is more sensitive to the market. Therefore, as world stockmarkets fell due to the credit crunch, gold shares suffered, too. Just as important, though, was an increase in costs for gold mining companies.”

Dampier also points out that the demand for physical gold exchange traded funds has made gold more accessible to private investors and more demand pushes up the price in the long term.

Eventually, however, the rising price of physical gold makes mining activity more profitable and gold mining shares eventually benefit.
The £1.7bn Black Rock gold and general fund run by Evy Hambro is up by 53 per cent over the past year after falling by 20 per cent in the previous 12 months.

Black Rock believes that the likely long-term trend of the gold price is upwards, again citing the prospect of inflation and the weak dollar.
Hambro says: “While uncertainty remains in financial markets, investors may continue to look to gold as a safe haven asset. However, in addition, investors are increasingly looking to gold as a potential hedge against inflation and any weakness in the US dollar.”

But Ed Bowsher, head of consumer finance at the financial website, says: “I am not convinced that inflation is set to soar. Among other reasons, there is no sign of a dramatic increase in the money supply.

“But even if inflation does jump, why is gold seen as a great hedge? I suspect it is just because it is the conventional wisdom. There is no logic to it. Gold is seen as a reliable store of value because we used to have the gold standard but that is long gone and is not coming back.”

Clear Financial’s Bullock puts forward three reasons not to invest in gold right now. “The first reason is you do not have to.” he says. “Gold has been in the press so much because of its increase in value in recent months. This alone is not a reason to invest. One of the most compelling reasons for steering clear of an investment is that when your taxi driver is recommending it, it is time to get out.

“Then there are the profit-takers. Many investors who are already invested in gold will be tempted to secure profits now that the market is reaching these levels.

“Finally, the idea that gold is a safe haven is no so convincing now. Those investors who looked to gold as a safe haven in 2008 will be looking to diversify into other asset classes now as confidence returns to equity and property markets.”

Bowsher does not rule out “a rapid rush to the door” by a lot of investors.

This is what happened nearly three decades ago when, in January 1980, the all-time record for the price of gold – adjusted for inflation – hit $850 an ounce. After reaching this peak in the wake of the Soviet invasion of Afghanistan, the price collapsed and it took 28 years for the gold price to return to $850 in January 2002, badly lagging behind inflation.

If the price of gold had even kept pace with consumer prices, let alone provided protection against inflation, the price today would stand at more than $2,300.


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