Gold: All you ever needed to know

21st April 2011

The purchase reported on FT.com was one of the largest by a central bank in recent history and was reportedly an attempt by the bank to diversify away from the "faltering dollar".

No wonder, as the price of the yellow metal keeps going up. Last month gold hit a new peak at $1,482 an ounce – a near 30% increase over 12 months.

Professor Gulnur Meradoglu, head of behavioural fianance at the Cass Business School, City University London, says that gold's appeal dates back centuries.

"Savings used to take the form of gold coins and for centuries gold jewllery has been given to new brides of many cultures, as a form of financial security, like a pre-nup is today."

Paula Bujia, fund manager of Schroder AS Gold & Precious Metals, believes the "current investment environment should be very supportive for further increases in the gold price".

Why does gold keep going up?

Fear, in one word.  Investors are frightened of the Middle East, eurozone defaults, out of control debts, the decline of the US dollar, inflation and much more. Fear requires portability – not paper based investments.  In some cultures, people wear gold to display wealth and to make a fast getaway.  Twenty kilos of gold – an airline baggage allowance – is currently worth £590,000.

When will the price rise stop?

This is a length of a piece of string question.  It's easy to find those who see it going through the $1,500, and $1,600 points. For instance, billionaire hedge fund manager John Paulson is betting it reaches $1,600 by Christmas. He's worried about currency instability. and who knows what beyond. GFMS, the independent metals consultancy, also says gold is expected to break $1600 before the end of 2011, supported by low interest rates and concerns over the stability of the economic recovery in developed economies. Standard Chartered's analysts are even more bullish looking for $2100 an ounce within three years and almost $5000 by 2020 thanks to demand from China and India.

I'm convinced. How do I buy it?

You could buy a physical gold exchange traded fund. But that could be a problem if the world financial system goes into meltdown. Really cautious investors go for the real stuff – a gold sovereign will set you back £230, a one ounce krugerrand £962 and a kilo bar £29,433.

Is anyone bearish on gold?

Yes, but they don't get glittering headlines. A recent Barclays Capital survey of institutional commodity investment players was anti-gold. Thee investment professionals say gold will need a new story, a fresh catalyst, to keep its nine year momentum trending upwards. They cite increasing interest rates in China and India. And some see investors moving to silver. It has more than doubled over the last year to a record $42.65 an ounce, its highest since 1980.

What can you do with gold?

It's used in electronic components and jewellery (although rarely 24 carat solid gold – the value of a gold watch is mostly the mechanism, not the case). You can look at it glistening in your safe. Otherwise, nothing. Gold produces no interest or dividends and if you buy bullion or coins, you'll have storage and insurance costs.

What happened the last time gold hit record highs?

Gold touched $800 over thirty years ago and then went down for two decades. Adjusted for inflation, it would need to hit $2,400 to equal its real 1980 value.

So gold is a sure thing then?

The more uncertain things are, and they are pretty uncertain right now, then the more powerful the hold of gold is over investors. Charlie Morris, a director of HSBC Global Asset Management points out that as soon as the world economy starts to recover the value of gold will fall.  He says: "I was at an event where Warren Buffett spoke the other week, he pointed out that you could buy all the gold in the world for $7 trillion dollars."For half that you could buy all the farmland in the US. His point is that you could fondle the gold, sit on it, stare in wonder at it, but you can't do anything with it."

Morris adds: "If it's inflation-proofing you are looking for consider infltion-linked gilts, or if you are looking to invest then some sensible shares such as Tesco. 

So weren't the Treasury and Gordon Brown daft to sell British gold a decade ago?

They sold about 400 tonnes ( half our reserves) from 1999 to 2002 at around a quarter of the current price. It was controversial then and remains controversial now. But that was in the days when the then chancellor claimed to have abolished boom and bust – and with it the fear that makes gold a last resort investment. Now fear is back – big time.

Learn more about gold here.

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