Don't be caught up in the new gold rush by Paula Hawkins and Richard Miles Investors should remember that the road to growth is not paved with gold
INVESTORS have been bitten by the gold bug again. The price of the precious metal has leapt to its highest level in more than two years as savers have scrambled for a safe haven from the political turmoil in the East and economic uncertainty in the West. But the recent rally in gold, spurred on by the weakening of the US dollar, masks a slow yet steady decline in the value of the yellow metal. Along with leg-warmers and old Labour, gold fell from fashion at the end of the Seventies, leaving long-term investors nursing some heavy losses.
Nor is gold expected to regain its lustre. The world has simply moved on, according to Andrew Milligan, head of strategy at Standard Life Investments. He says that the international financial system is now so robust that “capitalism would have to come to an end” for gold to reassert itself as the asset of last resort.
“Broadly speaking, gold has had its day,” says Jeremy Batstone, head of research at NatWest Stockbrokers. And by way of justification, he points to the recent sales of gold reserves by several central banks, including our own. “This is the Bank of England indicating that gold is losing its significance as a buffer against any financial crisis.”
There has been no physical link between gold and sterling since Britain was forced off the Gold Standard in 1931. Nevertheless, gold retained an attraction for investors for some time. A portable form of wealth, gold also offered tangible protection against rampant inflation in the postwar era.
Throughout the 1950s and 1960s the gold price rose steadily, from $35 an ounce in 1950 to $44 in 1969, a respectable enough increase of 26 per cent. At the same time, however, the stock market rose by more than 360 per cent.
It was in the turbulent 1970s, the era of oil shocks, hyperinflation and the three-day week, that gold came into its own. By 1972 the price of gold had risen to $127 per ounce and by 1980 it had reached an all-time daily high of $850. Anyone who had invested in gold in 1969 had seen the value of their investment rise by more than 2,000 per cent.
Since then, the fate of the gold investor has been miserable. Better economic management in the 1980s and 1990s led to greater stability, and this, coupled with booming stock and property markets, meant that gold fell out of favour. Most Western central banks offloaded large proportions of their gold reserves, choosing instead to hold foreign exchange.
By 2001 the price of the precious metal had fallen to $293. An investor who had bought £1,000 worth of gold in 1980 had seen the value of his investment shrink to a mere £350 over two decades.
Recent events, however, have conspired to revive the gold price. Although the shock of September 11 did not have an immediate impact on prices, the continued threat of terrorist attacks, along with the mounting tension in the Middle East and the Asian sub-continent have undoubtedly boosted gold prices.
The Chinese and Russian central banks are also keen to increase the percentage of their reserves that are physically held in gold. There has been also a surge in demand from Japanese private investors. In April this year the Japanese Government withdrew guarantees on the savings deposits of high net worth individuals.
Next April guarantees will be withdrawn for all deposits. Fears of a collapse in the banking system are widespread. Japanese investors have flocked to swap yen for bullion. In the past six months Japanese imports of gold have risen by 900 per cent.
Ian Williams, head of the fixed-interest team at Durlacher, the stockbroker, is a strong advocate of gold. He says: “Our bullish view of the gold market is based not just on the India and Pakistan story — that may be a catalyst — but on the fundamentals of the gold market.”
He says that supply has dwindled while demand is rising. Sales by some central banks are now restricted, and in many cases the central banks have sold all the gold that they can.
But not all analysts agree, though. John Smelt, head of natural resources at Aegon Asset Management, says that it is difficult to assess the demand and supply balance in the gold market because central banks sit on so much bullion. Mr Smelt prefers platinum, where the balance between supply and demand is so much more visible. “And platinum, has plenty of industrial uses.”
Gold bugs talk excitedly about the price soaring to $400 and beyond, but others are more cautious. The charts certainly suggest that the latest rally is no more than a blip in a long-term trend of decline that could be snuffed out by a rise in interest rates or a reversal in the dollar’s decline. There is an old saying in the markets that gold rises when the dollar falls.
At NatWest Stockbrokers, Mr Batstone suggests that gold will come back into its own as an asset of last resort only if there is a geological catastrophe or a nuclear war, or if rampant inflation stages a comeback.
“We are talking about risks here that are off the scale in terms of the normal levels of risk,” he says.
Nonetheless, it can pay to keep an eye on the gold price, even if you have no intention of buying, says Mr Milligan, of Standard Life Investments.
“You need to look at the signals that gold is giving off,” he says. “At the moment it suggests risk aversion and the return of inflation. That can tell you where you should be investing your money.”
Bullion points
The World Cup trophy is 32cm high and is made of solid 18-carat gold.
There are 142,600 tonnes of mined gold in the world. It is estimated that 90 per cent of this has been mined since the California gold rush began in 1848.
Contrary to popular belief, the world’s largest store of gold is not at Fort Knox but at the Federal Reserve Bank of New York.
Gold melts at 1,064 degrees centigrade and boils at 2,808 degrees centigrade.
The earliest gold jewellery, found in southern Iraq, dates back to 3000 BC.
Gold is not only pretty, it’s useful. The rocket engines of US space shuttles are lined with gold alloys to reflect heat.
Touch-tone telephones generally include up to 33 gold-plated contacts.
Shares in Durban Roodeport Deep, a South African goldmine, have risen 400 per cent in 12 months.
Elvis Presley owned a sports car with a solid gold steering wheel, pedal surrounds, cigarette lighter and ashtray.
