Jenny Lowe outlines the options for investors looking to get into gold.
Over recent years, having exposure to gold within a portfolio has proved to be a winning formula for investors, and the past 12 months have been no different. In 2008, gold trounced all other asset classes for the second year running, and at the beginning of 2009 it hit a seven-month high of US$973.2 an ounce. So what can we expect from gold going forwards?
A safe haven
JPMorgan Asset Management’s global strategist, Tom Elliot, explains, ‘Gold has always been the ultimate safe haven and a valued international reserve currency. Indeed, it is called a ‘precious’ metal for good reason. The nominal price of gold fell from US$850 in 1980 to a low of $252 in 1999. More recently, of course, the price of gold has reached record levels against both the US dollar and the euro.
‘While the price of gold can be volatile, it has a proven track record of maintaining its purchasing power over many decades and centuries. Its value, as a factor of demand, will therefore fall when the need diminishes for individuals and businesses to hold a protective asset such as gold (i.e. reserves).’
There are a number of ways for individual investors to gain exposure to gold, with the most traditional being to invest in the physical asset. Jewellery is an obvious option, but the price you pay also includes craftsmanship and VAT alongside the cost of the metal itself, so you are paying a premium. You can also buy coins and small bars, but again, you will end up paying a premium because of the need to both store and insure it.
Recently, new investment routes have opened up, such as BullionVault.com, an internet-based gold bullion exchange and physical storage provider that enables investors to purchase gold which is then held in their professionally managed vaults.
When it comes to investing in the physical asset, there are a number of difficulties that arise, such as transporting, storing and verifying pure gold bars. But Adrian Ash of BullionVault.com points out that ‘Cut-price innovations online enable you to buy, own and sell small portions of large 400-ounce “good delivery” bars – the very same bars traded in the spot market by professional dealers – starting from as little as one gram (£18) at a time. You don’t get possession, but you can take delivery of your physical gold, owning it outright and free from counter-party and default risk, inside secure, specialist vaults in exactly the same way that the professional market holds gold.’
However, the steady rise of exchange-traded funds (ETFs) and exchange-traded commodities (ETCs) has made investing in gold much easier, and considering physical gold is in limited supply, this route has become quite popular of late.
These products, instead of investing in the commodity itself, track the performance of an index or sector. So, with a gold ETC, your investment will rise and fall with the gold price. The range of ETFs and ETCs is also rapidly expanding. For example, ETF Securities offers both a physical gold fund backed by actual gold bars or the option to track the spot price via its Gold Bullion Securities fund.
In the current environment – with the government boosting the money supply, interest rates at an all-time low and government debt levels rising at a rapid rate – Nicholas Brooks, head of research and investment strategy at ETF Securities, suggests that the rush into gold by investors was only to be expected.
He explains, ‘With financial instability high, counter-party risk a serious issue, governments boosting the money supply at an unprecedented rate, and government debt levels expected to grow rapidly over the next few years, there are good reasons for conservative investors and the general public to want to hold a portion of their assets in gold.’
Brooks concludes, ‘Gold’s price performance and demand last year certainly fit this trend, with gold one of the best-performing assets in 2008 and also over five and ten years. Last year, gold was up four per cent in US dollars and 44 per cent in sterling.’