14 September 2009

as good as a mention of Gold gets in the financial pages..

The financial sector want trailing payments, brokerage and basis points. It doesn't celebrate Gold, ever. I prefer Bron's advice here!

Good as gold
September 13, 2009

The gold price has gone through the roof, cracking $US1000 an ounce for the third time in history last week - and mum and dad investors are jumping on board.

FANCY adding a bit of glitter to your investment portfolio? Want to ride a metal that has posted seven years of consecutive price growth and which has more than trebled in value over the last decade? Well get on board the gold train - everyone else is doing it at the moment.

These days you don't have to go down to your local mint and buy an ingot of the precious stuff to get gold working as an investment for you (one would cost you a tidy $US400,000 at the moment). There are much easier ways in which you can indirectly or directly ride the gold price - we will come to them in a minute. The issue is whether you should do it. And if so, should it be now?

At the moment, there seem to be as many people calling gold lower from here as higher - although those who say lower say a little bit lower and those who say higher believe gold will go through the record high of $US1033 an ounce set 18 months ago and possibly up to $US2000 an ounce. Eye-watering stuff.

In a recent note to clients, Credit Suisse, for example, said it expected gold to keep rising through September and October and indicated $US1200 an ounce was not out of the question - not bad given that gold was at $US250 an ounce in 2001.

But history also sounds a note of caution. Just as some people have been obsessed with gold since ancient times, there is a type of investor who does the same - they are called ''gold bugs'' and are perpetual believers in the value of gold and its ability to beat recessions, counteract inflation, replace cash and generally cure everything investmentwise.

They are not cup-half-full people when it comes to the yellow metal - they continually see it as overflowing. And they are on a roll at the moment.

The problem is, if you look back over the decades, few of their arguments really stack up. Yes, gold has charged this decade but it was on a downhill ski run for many years before that. The gold price spiked in the early 1980s, reaching $US850 an ounce. If you adjust that for inflation, it would be over $US2000 an ounce in today's money. So it's not a set-and-forget investment - but it can also be brilliant if you play it right.

CommSec chief commodity strategist David Moore is one sounding a note of caution. ''There are a number of things that have contributed to the strength in the gold price,'' he says. ''The $US has been depreciating and investors have been buying gold as a hedge against that, and there has been a surge in investor interest in gold - jewellery fabrication demand such as from India is quite weak at the moment.''

He expects investor demand to wane a little and for gold to trade back to around $US950 an ounce by the end of the year and to fall further again in 2010. ''Retail and institutional investors have been buying gold because they are concerned about the economy and see it as a safe haven - but they have got to be careful about that; the historical record for gold is quite inconsistent in this regard.''

Shane Oliver, head of investment strategy at AMP Capital, sees gold going higher though. ''We are entering the Indian wedding season, which is traditionally a strong month for gold - there is a lot of liquidity in the global financial system and investors are buying gold as a hedge against inflation.''

But Dr Oliver warns that the recent rise of the $A to a 12-month high against the $US has eroded about half the recent gains in the gold price in $US terms when translated back to $A. ''And there's probably more $US downtrend to go.''

However, Perth Mint depository administrator Bron Suchecki says investor demand remains strong, for gold coins through to the big ingots. ''There was quite a surge in demand last year and it put a lot of mints into rationing mode,'' he says. ''It has fallen back a bit from there but there is still strong demand.''

Mr Suchecki also notes the Russian central bank has indicated it will be increasing its gold holdings, while China has increased its gold reserves by 450 tonnes since 2003. ''This isn't a boom-and-bust scenario; there's a broad-based interest in gold. So even if it does fall a bit, it is not going to fall dramatically.''

Still interested in buying? There are many ways in which you can do it easily these days. The surge in investor interest in gold lately has been in the main in gold Exchange Traded Funds (ETFs). These are traded like shares on the sharemarket and track the gold price because the fund stores gold ingots to back up your investment.

There are a few of these gold EFTs in Australia - they were actually invented here six or so years ago - but the really big ones are overseas, with one in the US holding 1000 tonnes of the stuff. There are also gold futures and warrants.

You can also buy gold directly from the mints and have them store it for you - the Perth Mint, for example, can offer you this service. But remember, you won't be able to take your gold out at any time as it would lose its value if you did.(What an Idiotic remark!!!!!)

You can buy mini ingots yourself and gold coins (but where to store?). Finally, of course, why not invest in the shares of gold producers themselves? They generally have fixed production costs - from about $US130 an ounce up to $US600 an ounce, so a gold price above that is pure profit. Austock senior adviser Michael Heffernan likes Kingsgate Consolidated and Newcrest at the moment.
Why gold is such an unusual investment

- Gold is number 79 on the Periodic Table, is untarnishable, chemically inert and indestructible but unlike many other metals, it has few industrial uses - electronics is the main one and dentistry.

- Gold is valued, then, simply because we like it - for jewellery and increasingly so we can store it for investment purposes.

- Since time began, it is estimated there has been a total of just 160,000 tonnes of gold mined - and we have lost only 2 per cent of this!

- If we got all this gold together, it would form a cube of about 20 metres by 20 metres.

- There is a total 45,000 tonnes of gold still to be mined that we know about too, but that's it - 205,000 tonnes and we are done.

- Because it has few industrial uses, the gold price doesn't necessarily reflect economic activity or a surging stockmarket.

- Its quantity is relatively stable too - gold producers add about 1.6 per cent to the pile every year. So, unlike central banks who can print swags of new currency any time they wish, with gold you pretty much know how much is out there.


1 comment:

Bron Suchecki said...

That statement "But remember, you won't be able to take your gold out at any time as it would lose its value if you did." I don't know where he got that from. There is no restriction on selling or taking you gold and I don't know how doing so would make you lose value.

I do have some sympathy for these mistakes, bound to happen when your editor tells you to write about something you haven't really been watching, as I discuss in http://goldchat.blogspot.com/2009/09/bubble-top-indicators.html