No investment can match gold for its longevity and mythical status. Gold has been a store of value for thousands of years, cherished for its beauty, brilliance, malleability and refusal to tarnish.
Ancient civilisations craved it. The Romans mined it and made coins. The Spanish conquistadors raided the Americas for it. And the British Empire pegged its currency to the price of gold, right up to 1931.
In times of trouble, investors instinctively reach for gold. When the financial crisis ravaged property, shares, cash and currencies, gold dazzled.
The price nearly tripled from just over US$500 an ounce in 2007 to a peak of $1,900 in August 2011, when the European single currency crisis hit a fresh level of intensity. At the time there was frothy talk of gold hitting $2,000, $3,000 or even $5,000, then just as suddenly, it lost its shine.
The panic subsided, the global economy began to grow, and investors turned to the US dollar as a safe haven instead.
Gold has continued to fall, currently trading at just $1,218 an ounce. If you had invested at the peak of the market, you would have lost about 38 per cent of your money. Over the past year, you would have lost more than 5 per cent.
Gold, for all its charms, clearly cannot be described as a safe investment. So should you finally give up on it?
“Gold has had a torrid time over the last two years, with investors more confident about the global economy and less in need of a safe haven,” says Adam Gent at Legg Mason Global Asset Management. “The strengthening US dollar, pledges by governments to support growth, and soaring equity markets have all worked against the precious metal.”
Tom Elliott, international investment strategist at deVere Group in Dubai, says gold’s reputation as a store of value means that while demand soars in times of high inflation, it has declined in today’s deflationary world.
“When inflation is a concern, so-called ‘fiat’ money, paper money issued by central banks, is devalued, and the gold price typically rises as a result. But this isn’t a problem in the near term, so investors sold off their gold,” he explains.
The second reason for the price falls is shrinking demand from the jewellery and electronics sectors, reflecting the slowdown in China and weakconsumer demand in the euro zone, he says.
While inflation stays low, the gold price could weaken further, but Mr Elliott says investors shouldn’t abandon it altogether. “You should continue to include gold in your portfolio as a hedge against inflation. In fact, you might want to seize advantage of any further price falls to build up a bigger position.”
One day, inflation will be back, Mr Elliott says. “Just as we take out insurance against having an illness or accident on holiday, a properly-diversified portfolio should contain protection against inflation. A small position in gold, perhaps up to 5 per cent, would prove a valuable asset if inflation does return.”
Stephen Davie, director of communications at ADS Securities, a financial services firm in Abu Dhabi, says the gold price has held firm in 2015, and continues to trade in a tight range between $1,180 and $1,220, with no clear direction.
Some investors might have expected gold to have performed better this year, given uncertainties such as geopolitical tensions in Ukraine, the global economic slowdown and central banker intervention, he says. “The decision by the Swiss National Bank to de-peg its franc from the euro sent the gold price surging to $1,305 an ounce, but the impact didn’t last.”
Gold has been held back by the resurgent strength of the greenback. Because gold is priced in US dollars, the price will typically fall as the value of the dollar rises (and vice versa).
“The fact that the gold price has stayed stable this year shows how valuable it is to investors.” Mr Davie says.
There is a big question mark hanging over the global economy and gold price: when will the US Federal Reserve finally start increasing interest rates?
“If the Fed does increase rates that would be seen as a sign that inflation is a problem again,” Mr Davie says.
“But if the Fed blinks and retreats from raising rates, this will be a clear sign that the economy is still weak. The US dollar trade will be over, the Fed’s credibility will be questioned, and investors will rush back into safe havens such as gold.”
Maike Currie, associate investment director at Fidelity Personal Investing, says predicting the gold price is difficult. “Gold doesn’t pay any income, which makes it harder to value against assets such as equities, property or bonds. Its price is largely a reflection of what someone else will pay you for it.”
With the price down one third on four years ago, gold is less risky than it was. “But it is just as likely to fall from here as rise,” Ms Currie says.
So don’t try to find the perfect time to invest. “As the old saying goes: you don’t wait to buy gold, you buy gold and wait. Unfortunately for gold bugs, it seems they may have to wait a bit longer.”
But Ms Currie says the fundamental attraction of investing in gold hasn’t changed. “Gold is defined as a ‘real asset’ and, historically, real assets have outperformed financial assets during times of economic turmoil.”
She says that if markets are heading for a “rate rage”, when central banks finally start increasing interest rates, gold may be the best place to seek shelter from the storm. “But remember, the lack of income from gold means that there is a cost to holding it.”
Chris Beauchamp at the investment trading site IG Index says every serious investor should have some exposure to gold. “Gold is never finished as an asset class. The prospect of holding something deemed to have such universal appeal means it will never go away entirely.”
But he says the “gold mania” of recent years took place in the backdrop of global crisis. “We are slowly entering a world of rising US yields, and with strong dividend payments available from the stock market, the appeal of gold has been significantly diminished. It should only be a small holding in a wider portfolio.”
While the Greek euro-zone crisis remains unresolved, Mr Beauchamp says that gold is unlikely to fall further. “As long as Athens bounces from one crisis talk to another there will not be any serious shorting of gold.”
If Greece is forced to exit the euro, and other vulnerable countries such as Italy and Spain come under pressure, the price could quickly spiral.
Ms Currie at Fidelity says that for investors, gold is of most practical use as a portfolio diversifier. “Gold is one of few assets largely uncorrelated to main markets, as we saw during the financial crisis when all asset classes plummeted but gold held its own.”
Stock markets and property prices have surged in recent years, while gold has lagged, but it won’t always be like that.
Investment markets go in cycles, and that should give gold the opportunity to glister once again.
How you can invest in gold
If you are tempted, there are a number of ways to invest. You can simply buy physical gold, say, by going shopping for jewellery in the souqs of Dubai, Abu Dhabi or in Muscat, Oman.
Alternatively, invest in the increasingly popular exchange traded funds (ETFs), which track the gold price. This is a secure and low-cost way to invest in gold, because you don’t physically buy or store the metal. Naturally, ETFs have tracked the gold price downwards lately, with the popular SPDR Gold Trust ETF and iShares Gold Trust both down about 7 per cent over the past year.
Another investment option is to buy shares in a gold mining company such as Fresnillo, Goldcorp, Kinross Gold Corporation and Randgold Resources.
This can be a particularly volatile way to invest in gold, as you are exposed to the performance of the individual company, as well as underlying gold price movements.
Fresnillo is down more than 15 per cent over the past year, while conversely, West Africa-focused Randgold is up 10 per cent over the same period.
Alternatively, you could spread your risk with a mutual fund such as Blackrock Gold & General, which invests in a portfolio of global gold and precious metals mining shares. It has fallen 3 per cent over the past 12 months.
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