After a 10-year bull run, conventional wisdom says it's too late to join the party. Is it different this time?
By Richard Evans
Published: 5:36PM BST 10 Sep 2010
The trouble with chasing performance is that you often join the party too late. Yet gold continues to defy the odds and if the great and the good of the investment world are to be believed, the gold price has further to go.
Last week, the analyst rated the most accurate forecaster of the gold price said the precious metal would keep rising.
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Gold demand jumps by 36pc Jochen Hitzfeld, an analyst at UniCredit, the Italian bank, has been rated by Bloomberg, the news agency, as the most accurate gold forecaster over the past three quarters. He reckons the gold price is heading for $1,600 an ounce.
His forecast is the latest in a long line of optimistic predictions. Other gold bulls include George Soros, famous for making £1bn by betting against the Bank of England, and John Paulson, the hedge fund manager who made $20bn by calling the credit crisis correctly.
These expectations that the price of gold will continue to rise come despite the metal already enjoying a decade-long bull market, rising from $253 in 1999 to its current level of about $1,260, a whisker below its all-time high of $1,265 reached in June.
"You can't mine gold," say nervous investors who fear that the massive printing of money by central banks under the guise of quantitative easing can only lead to runaway inflation. Sceptics of gold as an investment point to the costs of owning it and the fact that it produces no income.
Finding an analyst who is bearish on gold is a tough task; most appear to believe that gold is a worthy asset, not least because of the continued economic uncertainty. But four years ago The Sunday Telegraph found one. Nick Goodwin, a much quoted South African mining analyst, warned people against jumping on the bandwagon when the price stood at $600 an ounce.
He said: "I have been following gold for 30 years and gold is a bitch. Why weren't people buying gold when it was $250 but want to buy it at $600? Gold has had a hell of run and it needs to take a breather." Mr Goodwin was proved mightily wrong and today the rationale for investing on gold stands firm.
Mr Hitzfeld said further increases in the price were "preprogrammed". He said factors exerting upward pressure were renewed fears among investors sparked by recent loosening of monetary policy by the US Federal Reserve and reforms in the Chinese market that gave investors there greater access to the metal.
"The Chinese government has encouraged consumers to invest in gold, and with great success. Chinese demand will now increasingly be felt on the global markets," Mr Hitzfeld said.
Although China is now the world's largest gold producer, this production would be insufficient to meet domestic demand, so China would increasingly import gold, draining supply from the rest of the world and putting upward pressure on the price.
The Chinese government's gold reserves have also risen sharply and there is scope for further increases, as they account for just 1.7pc of foreign exchange reserves, Mr Hitzfeld said. "We are therefore raising our target price for 2011 from $1,250 to $1,400 per troy ounce. For 2012, we now expect $1,600 an ounce."
Analysts from ANZ, the Australia and New Zealand banking group, agreed. Describing gold as "the best asset class to be in", the analysts, Mark Pervan, Natalie Robertson and Andrew McManus, said: "Gold has been the strongest performing and least volatile major commodity and financial asset class in the past 10 years – we expect this trend to continue.
"We see more upside for gold prices as the key drivers of a safe-haven and currency-hedge demand are joined by the emergence of strong demand from China and India. We believe prices could reach $1,350 by early 2012 and stay there for 12 months before investment and safe-haven demand eases."
Charles Morris, who oversees about $2.5bn at HSBC Global Asset Management's Absolute Return fund, has just liquidated his holding of long-dated bonds and agricultural commodities and is backing gold instead.
George Soros, meanwhile, had about $635m invested in a gold exchange-traded fund when he reported his holdings to the US markets regulator in June. And John Paulson's fund holds a gigantic £3.8bn position in gold, again via an ETF, in addition to large holdings in mining companies.
The issue for investors who have yet to invest in gold is whether it is too late. Mr Soros may be a gold bull at the moment, but he still has his reservations. He said in January: "When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold."
The message seems clear: when Mr Soros dumps his gold exposure, the glittering bull run could well be over.
how to Invest in gold
Gold has traditionally been seen as the ultimate inflation-proof asset and the dramatic rise in the price over recent years testifies to investors' continuing faith in the metal during economic turmoil.
As the supply of gold cannot be increased at will, and as industry and the jewellery trade compete with investors, a collapse in its value in the way that currencies can sometimes succumb to inflation is unlikely. But before heading down to a bullion vault, remember that, unless you hedge against currency risk, you are exposing yourself to fluctuations in the US dollar, in which gold is always priced. Last year, British investors taking a punt on gold would have seen the value of their investment fall because of the dollar's slide against sterling.
You can hold gold as a physical asset or in non-physical ways. If you own actual gold, which you can buy relatively small amounts, remember to factor in insurance and storage costs. When you own physical gold yourself there is no "counterparty risk" – your investment does not rely on someone else keeping their promises or remaining in business. Gold jewellery also avoids counterparty risk, but more of its value may be linked to fashion trends.
To avoid counterparty risk as well as the inconvenience and risk of having gold in your possession, an "allocated gold account" might be useful: you pay a vault to store gold on your behalf.
Another option is an unallocated account. You still own gold stored at a custodian's vault but you don't own specific bars and are exposed to counterparty risk – if the custodian goes bust you can't reclaim the gold and will simply be a creditor.
Alternatively, follow Mr Soros and invest via an ETF – "physically backed" ones that own actual gold should be the safest.