The gold rush: Is it too late to jump on the bandwagon?
Fed up with derisory rates on deposit accounts and negative returns on
investments, savers have been flocking to the classic haven of gold.
But is their timing right?
By Paul Farrow and Richard Evans
Last Updated: 9:42AM GMT 13 Mar 2009
They have been snapping up gold bars and krugerrands at their local
bullion dealer. "We did have people phoning up to inquire about buying
gold after hearing the news about printing money," said a spokesman
for Baird & Co, the bullion dealer. "Some said they planned to buy a
bar or two as a result."
Buying gold bars – in small quantities at least – is no different from
buying a packet of sweets. Anyone can walk into Baird & Co in the
City, hand over some cash and take away their gold. "The most popular
small bar is probably the one ounce," said the spokesman. This now
costs £718.25. But smaller bars are available: the company's smallest,
2.5 grams, costs £64.25."
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It is not just physical gold that we are buying. Volumes of trade in
exchange-traded funds have hit record highs, while one bullion dealer
claimed to be taking in £1 of every £100 withdrawn from British banks
(a record £2.3bn was withdrawn from our banks in January).
Exchange-traded funds enable small investors to invest in gold from as
little as £50 without having to own bullion.
The huge demand sent the price of gold through the $1,000 mark last
month, but in the past fortnight the price has dropped back.
The primary driver of the demand for gold is fear. The financial
crisis and the drastic action governments worldwide have taken to try
to alleviate the problems are unprecedented. No one knows the eventual
outcome, but many economists reckon inflation will inevitably return,
which will support the price of gold.
Chartists will say gold tends to rise early in the year before
falling. It is a play hedge funds take part in, but there have been
signs they have been de-hedging. That suggests they think gold has
further to go. The bulls also think gold looks set to move
substantially higher as governments embark on "quantitative easing" –
or printing money.
"Many other countries are certain to follow suit as governments
worldwide take a conscious decision not to suffer a Thirties-style
economic collapse. This is fair enough but is not a cost-free
exercise: the price will be much higher inflation further down the
road," says Ian Williams, chairman and chief executive of Charteris
Treasury Portfolio Managers.
"The consequences are crystal clear to most investors – gold is the
ultimate safe haven from governments' attempts to debase their various
currencies, and will become the asset of choice for many investors
wishing to protect themselves from these shenanigans."
Last July, Mr Williams suggested $2,000 an ounce on a two to
three-year view was possible. This would bring gold back up to its
historical peak in real terms (dollars) last seen in 1980. "This could
now turn out to be a substantial underestimate as the stage is now set
for gold to rise to $3,000 an ounce or higher as a wave of freshly
printed liquidity sparks a renewed global surge into the only asset
that investors will trust in these circumstances," he said.
There are fears that private investors have once again got their
timing wrong, because many are jumping on the bandwagon. Last week new
software from GoldMoney was launched allowing iPhone users to trade
gold on their mobile, while a new website YourGoldForCash.co.uk allows
people to sell jewellery online.
This is starting to worry analysts. And amid all the bulls, a few
bears are beginning to put their heads above the parapet. Several
analysts have been taking profits in the past fortnight, unconvinced
that the price of gold can sustain itself above the $1,000 barrier.
Indeed, each time it nudges above the $1,000 an ounce mark, it falls.
Jonathan Prechte, an analyst said gold should go significantly lower.
''Too many people now think owning (it) is a good idea. Remember when
everybody thought owning property and stocks was a good idea?" he
said. "Again, nothing is certain, but I like betting against crowds.
And we have had so many to bet against in recent years: real estate,
stocks, subprime mortgages, the New Economy, oil, collectables,
commodities, baseball salaries, and now silver and bonds. It's been a
smorgasbord of opportunity."
Dennis Gartman, an American economist, said: "Crude oil is rallying;
and yet gold falters. The grains rallied; and yet gold faltered. The
base metals have rallied, but gold is faltering. The monetary
authorities have force fed money into the system, and yet gold is
faltering. In an environment where gold should be heading skyward, it
is not, and when something that should be rallying isn't, we pay heed,
find our keys, call for the valet to bring our car around and leave
the party quietly."
There is a consensus – even among the bears – that gold will be
volatile in the short-term, but it still has a role to play in a
portfolio over the long-term.
Jeffrey Nichols, managing director, American Precious Metals Advisors
& NicholsOnGold.com, remains bullish for the long term (he foresees
more than a doubling of the gold price in the next few years), but
said the immediate picture was ''less rosy''.
"The market has had to absorb an absolutely fantastic flow of old
scrap. Millions of people have cashed in their old gold jewellery. In
the US, people are holding gold parties where they and their friends
sell unwanted jewellery to itinerant scrap buyers. Meanwhile, gold
also remains vulnerable near term to further appreciation of the US
dollar against the euro and yen," he said.
"It's important for gold-market participants to remember that
long-term trends are always rational but short-term volatility is
often emotional and sometimes just meaningless noise.''
If buying gold today, ask why you weren't buying a year ago when the
price was below $800 last year. If that does not put you off, ask
yourself how long you intend to invest in gold and why. Is it to
diversify a portfolio or to make quick gains? It is, perhaps,
pertinent that even some of the most ardent bulls – and those that
rely on gold for their business – have concerns that the market is
''toppy'' in the short term.
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