Are you sold on gold?

Is gold still a worthwhile investment, or is its shine wearing off? Our amateur investor Tom McIntosh reports

Gold has its own special allure. Brides, Bond villains and Olympic hopefuls all covet it. Spandau Ballet rhapsodised about it. Gordon Brown was less fond of it, but investors have remained steadfastly loyal. It is the metal that people have turned to in times of economic, financial or political uncertainty as a way of trying to protect their hard-won wealth.

Since the current turmoil began in 2007, the price of gold has risen from around $600 (£390) an ounce to peak in September 2011 at over $1,900 (£1,230) an ounce. It’s currently around $1,620 (£1,050) – so is it still a shining prospect?

The basic investment purpose of holding gold is to diversify a portfolio and to preserve capital over the longer term, while avoiding the purchasing power of money being eroded.

At the moment, real interest rates remain low so there’s little joy there for savers and governments worldwide that are pumping liquidity into the system by a variety of methods. All this activity risks inflation in the future – backing up the fundamental arguments for investing gold.

There’s also a wide range of gold funds that are generally liquid and have more moderate costs – but there are some disadvantages with these, too

Using gold as an investment can be done in a variety of ways. The most obvious is to buy gold bullion, though this can be expensive: the retail pricing mark-up, insurance and storage costs can add up to 10 or 15 per cent in fees.

There’s also a wide range of gold funds that are generally liquid and have more moderate costs – but there are some disadvantages with these, too. First, most funds trade in gold on the London market and this gold is unallocated – which means that the fund is not registered as the owner of specific bars, but only holds the right to require the delivery of certain amounts of gold. Unallocated gold is not the investor’s property so the investor is lending the gold to the bank, rather like a cash deposit but without deposit protection.

Exchange-traded funds (ETFs) – an investment fund traded on stock exchanges in the same way as stocks and shares – offer a relatively cheap way to access the gold market. On the other hand, they are paper assets, effectively just a pledge in paper form for gold bullion ownership. If the body providing the ETF failed, it would leave you – the investor – as a creditor. You could take physical delivery of gold though it is not encouraged – bad idea to have gold bars lying around the house, however vigilant your Neighbourhood Watch is.

For an investment in gold to truly be worth the while, holders should as far as possible ensure that they have “undiluted exposure to the physical commodity” – in other words, your fund does not mix an investment in bullion with gold mining company shares, gold futures or other precious metals or their derivatives.

And, if possible, it should be in allocated form – uniquely identifiable bars of gold, regularly audited, that the customer can go and see and touch and segregated from other metal held in the dealer’s vault – so that the risks from the failure of counterparties are kept to a minimum.

 

Tom McIntosh is a former chief executive of an asset management company and financial adviser. He may have an interest in any of the investment topics he writes about.

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