The gold rush has started, but will it last?
With equities in turmoil, investors are retreating to an old-fashioned store of wealth
By William Kay, Personal Finance Editor
29 January 2003
Gordon Brown must be sick of hearing that the gold price has gone up yet again. In 1999 the Chancellor decided to sell off more than half of Britain's official gold reserves of 715 tonnes. The subsequent auctions raised about $3.5bn (£2.1bn at today's price). But the gold price has since soared from $261 an ounce to this week's Iraq-inspired peak of $371, at which level those 395 tonnes would have fetched about $4.7bn
Judging by the number of calls financial advisers have been receiving from their clients, Mr Brown is not alone in feeling that he has missed out on a classic hedge against uncertainty, wars and falling stock markets.
But Evy Hambro, director of the highly successful Merrill Lynch Gold & General unit trust, said: "Gold is still relatively cheap, but where the price ends up is anyone's guess."
Mr Brown's gamble was not looking too far out a year ago. The gold price started 2002 at $278.10, but as stock markets continued to plunge and President George Bush stoked up anti-Iraq feeling, the price took off and ended the year at $342.75.
Gold bulls take comfort from the fact that, even at this level, it is still less than half the $800 an ounce it hit in 1980 after a decade of inflation, when the Cold War was at its height and the former Union of Soviet Socialist Republics had embarked on an ultimately unsuccessful invasion of Afghanistan. At the peak of the 1980 gold fever, people queued outside jewellery shops in Britain to sell their gold ornaments and David Morgan, now chief investment manager at JP Morgan Private Bank, remembers carry bags of gold coins around the City of London accompanied by a minder to make sure he was not mugged.
Mr Hambro said: "The gold market is currently testing a whole range of prices to see where it will go. But it is below its 20-year average price and in most commodity bull markets the price goes from well below average to well above. And, unlike oil, it is very expensive to produce."
However, many advisers are still cautious. Henry Lancaster, the gold analyst at Coutts & Co, the private bank patronised by the Queen, said: "As a commodity, gold demand is mainly related to jewellery and the main countries for gold jewellery, India and the Middle East, are both quite weak. As a currency, gold has risen against the dollar but we don't think that will go much further, which leaves gold's role as a political hedge. And, once the Iraq situation is resolved, that too will decline, so we expect gold to settle at a lower price and are not recommending it."
This tug-o'-war between gold's bulls and bears has been going on ever since the metal was discovered before the bronze age 5,000 years ago. Some see it as the ultimate store of value as it is easily transportable and virtually indestructible, except by being dissolved in cyanide. Yet it is fairly soft, so can be moulded into shape for jewellery and artefacts.
There are about 145,000 tonnes of gold in the world, and another 2,500 tonnes or so is mined each year, 80 per cent of which goes into jewellery. But all the major discoveries appear to have been made, so nowadays tonnes of rock and earth have to be dug or blasted out of the ground to produce an ounce of ore.
This costs about $250 an ounce, so mines around the world are either beginning to explore more deeply or unwrap previously uneconomic mothballed mines. That, however, depends on the vital question of how long the price will stay at current levels or above.
Mr Hambro at Merrill Lynch said: "Having been a forgotten asset, gold is coming back on to investors' radar screens initially as a fringe side-bet and eventually as a mainstream holding. The rate at which this evolution to mainstream asset occurs, if at all, will be critical.
"Investors have now had three years of negative returns in the equity market, and even the most stoical are getting demoralised. After torture like this, an investment in gold or gold shares starts to look quite sensible."
The Merrill Lynch view is backed by some advisers to private investors. Graham Neale, a director of the London stockbroker Killik & Co, said: "I think gold looks quite attractive. We are going to see the price being volatile, because of expectations about when, if and how long the Iraq war will be. But the long-term fundamentals are quite strong." Mr Neale pointed to the need for the US and European countries to inflate their economies, which he thought would weaken the dollar, euro and sterling. He added: "The risks are a faster than expected resolution to either the Iraq conflict or the US and Europe's economic problems."
Philippa Gee, investment strategist at the Midlands adviser Torquil Clark, said: "We have been getting quite a number of calls about gold. My concern is how long they want to invest for. There is an argument for gold as a short-term alternative to cash, but over nine to 12 months I don't see the strength and conviction there. I believe it is better to put money slowly into the stock market."
Phil Clemence, investment director of Towry Law Investment Managers, said: "People entering at this level must realise that it is an extremely specialist area and it should not take up a significant proportion of anyone's portfolio. I think there are better options around if you are worried about political risk, such as index-linked gilts."
In the end, though, the gold rush will be brought to an end by the gold mines themselves. As Mr Hambro put it: "The producers always prick their own bubble. Eventually they will put more gold on the market, which will bring supply and demand into equilibrium."
The biggest reservoir of gold in the world is sea water. The only trouble is, no one has worked out a way of extracting it.
GOLDEN OPPORTUNITIES WAYS TO INVEST IN THE PRECIOUS METAL
* Coins, wafers and bars, which can be bought from specialist dealers. Gold wafers can be as light as one gram costing about £8.20.
* Funds such as the Merrill Lynch Gold & General, which was the most successful unit trust of 2002.
* Pool accounts, where many investors' money is used to buy bullion.
* Accumulation plans, which work like other types of savings schemes, in that people put in a regular amount every month for at least a year.
* Futures contracts, firm commitments to take or make delivery of specified quantities and qualities of gold on a prescribed date and at an agreed price. Losses can be unlimited.
* Options, giving the holder the right but not the obligation to buy ("call" option) or sell ("put" option) a specified quantity of gold at a pre-determined price by an agreed date. Losses limited to the option price.
* Customised deposit accounts, which use futures and options contracts to benefit from the gold price, but are guaranteed to pay back the original sum invested. Coutts bank arranges these for clients.
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