February 27, 2009 8:05 pm

Economy may cause gold to gleam again

Gold’s rally was halted this week – the metal’s price fell from its peak of more than $1,000 per ounce earlier this month, to trade at $948 yesterday in London.

But this retreat had been expected, and analysts still believe that gold may approach last year’s record of $1,030 per ounce again in the coming months, if the economy worsens.

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The liquidation of long positions by hedge funds and other short-sellers drove the price climbdown. However, the market remains robust and shrinking supply bodes well for gold in the long-term, analysts claim.

Last year, gold production in South African mines slumped by almost 14 per cent to 220 tonnes – a poor showing compared with the more than 1,000 tonnes of gold produced by the country in 1970. The world’s total output of gold also fell, dropping almost 4 per cent to 2,385 tonnes.

“This week, we saw another healthy correction in the gold market and it’s merely the pause that refreshes,” says Mark O’Byrne, a director at Gold and Silver Investments. “Demand is set to remain strong for the foreseeable future while supply remains tight, especially as central banks are increasingly reluctant to sell their gold reserves.”

The consensus is that gold will find its floor at a price of $930 to $940 per ounce in the short-term, before rebounding and rising towards last year’s record of $1,030.

At the same time, retail demand for gold, silver and platinum remains robust. The rush by retail investors into bullion coins is creating shortages, with global mints struggling to meet the surge in interest.

This scarcity is lifting coin premiums to as much as 5 per cent above the spot gold price – a level reached briefly after the collapse of Lehman Brothers last September, when coin shortages were also reported.

Last week, inflows into the gold exchange-traded commodities (ETCs) offered by ETF Securities rose by $31m or 44,937 ounces. The London-based investment company reports that its physical gold holdings – to back the ETCs – increased by 33 per cent in the last quarter to $7bn.

Inflows into the group’s ETCs backed by physical platinum also rose last week, to $14.4m, while its physical silver ETCs saw renewed interest thanks to the metal’s impressive 29 per cent rise since the start of the year.

Compared with other markets, precious metals’ long-term performance is strong. Gold is up more than 140 per cent in the last five years and silver is up 110 per cent. Over the same period, the FTSE 100 returned just 13 per cent.

As well as buying into these ETCs – which either track gold’s spot price or invest in bullion – investors have also sought refuge in precious metal funds, options, riskier futures contracts offering leverage, bullion-backed certificates, mining shares, and physical coins and bars.

But one advantage of using the 16 or so ETCs is that they are relatively liquid, permitting buyers to take advantage of fluctuations in price.

Another option is to buy into the handful of more diversified natural resource funds that invest in bullion, mining companies in Australia and South Africa, and other metals.

In the past six months, these resource funds have reported mixed returns. Investec’s Global Commodities and Resources fund is up 12.4 per cent, but Baring’s Global Resources fund has lost 45 per cent, according to Morningstar.

Bars and tradeable coins such as krugerrands and sovereigns can also be bought and sold through dealers. The most liquid bars to trade are Good Delivery bars, sold off by central banks. They can be put into a self-invested personal pension (Sipp).

The internet has opened up the market for smaller amounts of gold to be traded easily, with groups such as Bullion Vault (www.bullionvault.com) and ATS Bullion (www.atsbullion.com) acting as marketmakers.

Storage of physical gold with banks in the US and Switzerland can also be arranged for investors with millions of pounds in assets.

A typical management fee of 1 per cent per year will be levied for the storage of £10,000 or more of gold in a Swiss account.

Lastly, investors could consider a gold investment scheme offered only by the Perth Mint in Australia (www.perthmint.com.au) to purchase aaa-rated gold certificates, which can also be put in a Sipp.

There are no ongoing costs for storing the gold – instead, $50 is paid per certificate
and there is a one-time charge of 2 per cent above the spot price. But an initial investment of $10,000 is required.

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