GLOBAL gold demand may be on the decline – down 11 per cent, or 138.9 tonnes from the third quarter of 2011. But it has had a series of highs since the economic downturn.
Gold is the classic “store of value”. It’s traditionally seen as a safe haven in troubled times, providing a hedge against inflation and the debasement of currencies. Today, continued and unpredictable inflation may mean investors should consider holding gold to diversify away from the diminishing purchasing power of traditional currencies. The money supply is continuing to increase rapidly, but the amount of gold in circulation rises at a comparatively pedestrian rate, roughly 1-1.5 per cent per annum.
But gold needs to be looked at in one of two ways: either as an investment option or as portfolio protection. If you’re buying gold as an insurance policy, you need to be in a position where you won’t mind if the price of gold plummets. Because “your other assets would probably go up as systemic risk recedes”, says Alasdair MacLeod of Gold Money.
THE PROS AND CONS
One benefit of gold is that “it is fully commoditised, and as an investment it is not at risk of government interference”, says Catherine Raw, director at BlackRock Gold. But the downsides are that gold is only worth the amount that people are willing to pay for it. It has no essential price tag.
Another inherent disadvantage with any precious or base metal is that your returns are exclusively dependent on movements in prices. According to Jason Hollands of Bestinvest, “unlike a share that may pay a dividend or a bond which pays a coupon, there is no yield on a bar of gleaming gold”.
There are three avenues open to gold investors. The first is physical gold. This is the lowest risk option as there is no counter-party risk, but there are storage costs to consider.
The second option is an exchange-traded fund (ETF), which can be synthetically or physically backed. The latter option is lower risk, as synthetic ETFs give the investor counter-party risk with the financial institutions who are providing derivatives. An ETF enables you to purchase the gold in smaller quantities, thus trading it more easily.
The final option is gold equities, which can open the door for growth and dividends. But the performance of gold mining stocks is now greatly disconnected from the price of gold, says Petroparlovsk founder Peter Hambro. So in the long run you will make a profit, but in the short term, if you are looking for stability, you should stick with the physical option.
The huge growth of the exchange traded products market in recent years has enabled investors to readily trade the physical price of gold itself, leading to great volatility in gold bullion prices. So if you choose the equity avenue, you are purchasing gold cheaply, but as a more unstable investment. Physical gold sells at around $1,713 (£1,070) per ounce. But it costs Petropavlovsk just under $1,000 (£630) to find, mine, produce and deliver gold, considerably lower than the market price.
MAKING A DECISION
If you want a high-risk portfolio, gold might not be the way to go. It is a good choice if you are concerned about real returns on cash in the bank, but want a low-risk investment. But it is also a good counter-balance to other things in your portfolio, which is why MacLeod advises having “a little bit of gold, roughly 5-10 per cent”. Gold demand may be down from this time last year, but it remained above the five-year quarterly average of 984.7 tonnes. The cost of producing gold is constantly increasing in money terms, so the chances of it coming down in price are lower, in Hambro’s view, than the chances of it going up.