Traders aiming to profit from further rises in the gold price are being advised to buy before an anticipated autumn rally. But portfolio managers remain sceptical about the metal’s use as a long-term defensive asset.

Last week, Julius Baer – the Swiss bank that manages a physical gold fund – revised its year-end price forecast upwards, from $875 to $925 per ounce, and said that it expected gold to hit $1,050 per ounce in 2010, rather than $900 as previously projected. Earlier in the month, the spot price had dipped below $910. Since then, however, gold has rallied strongly – breaching $950 earlier this week, before closing on Friday at $952.

Research from BullionVault.com, the online gold exchange, suggests this is now part of a seasonal trend that private investors can exploit by trading physical gold.

Its analysis has found that, on the 20 occasions since 1969 when the gold price dipped in the summer before rising to the year’s end, the average gain for UK investors who bought in the lowest-priced month between June and September was 13.7 per cent over six months.

“As a rule, you want to buy in the summer, not September or October when the price has risen,” says Adrian Ash, BullionVault’s head of research. He describes this mid-year dip as a “summer sale”, and points out that the 18 per cent “discount” to which the gold price fell, compared with its February high, was the steepest since 1992.

Summer falls in the price are not, in themselves, predictive of rallies. Over the last four decades, the gold price dipped and then rose to end the year higher only half the time: 20 out of 39 summers.

Buying in a summer dip failed to pay off in 2000 and again between 2004 and 2006. “There’s no guarantee the typical rally will follow, of course,” admits Ash.

But profitable “summer sales” occurred most frequently during longer-term bull phases – 13 of the 20 rallies were recorded in the 1970s and in the current decade.

In fact, since the Treasury sold half the UK’s gold reserves in 1999, the sharpest gains for UK investors have come over the six months from September to February, with price rises averaging 14 per cent.

This summer, with concerns about inflation gaining ground, Ash argues that “investors looking to defend their savings might want to act sooner rather than later.”

This week, Moonraker Fund Management revealed that US hedge fund managers were already doing so. Of the 22 managers it interviewed, 20 said they were buying gold because of fears that quantitative easing would result in a bout of steep price rises. As a result, Moonraker’s chief investment officer Jeremy Charlesworth says he “sees more upside in gold despite the gains seen every year since 2001.”

According to the World Gold Council, some investors began boosting their holdings earlier this year. By the end of June, the price had edged slightly higher to $934.50 an ounce, against $916.50 at the end of March.

“Gold was sought by investors who had growing concerns about central bank’s exit strategies and the implications of a reversal in quantitative easing measures,” says the Council’s latest Investment Digest.

Rather than buy physical gold, though, traders have continued to add to their holdings via listed exchange traded funds (ETFs), while retail investment in coins and small bars has slowed. This has so far compensated for weaker demand for gold from the jewellery industry .

“Since mid-May, [ETF] demand has increased and total holdings for the nine largest ETFs were close to 54m ounces,” says Stephan Mueller, manager of the Julius Baer Physical Gold Fund.

“We expect ETF demand to remain strong in the long term, as an increasing number of investors view gold as a strategic part of their asset allocation,” he adds.

“Thanks to gold’s low to negative correlation with other asset classes, it provides attractive diversification benefits to help optimise the risk/return profile of an investor’s portfolio.”

However, while the ability to trade gold ETFs and spread bets provides a short-term opportunity, discretionary portfolio managers question the metal’s long-term returns.

James Edgedale, chairman of investment managers JM Finn, points out that gold has underperformed over long periods.

“If you go back 25 years, gold was totally pointless until eight to 10 years ago. Investors suffered a loss of value over a 15- year period. Naturally, it is now going up as a ‘store of value’, because of hedge fund demand, private investor demand and Far Eastern demand. But it can quite easily go the other way. It isn’t the long-term store of value that people think it is – it has no industrial use, and provides no income.”

Even Ash of BullionVault concedes that gold remains more of a short-term play on interest rates and inflation, than a long-term portfolio diversifier.

“The long-term benefit normally espoused is its non-correlation with stocks, but it is sometimes highly correlated – from 2003 to 2008 it was very strongly correlated, and so far in July, it is correlated with the S&P 500, with an R-Squared [a measure of an assets’ price movement in line with the index] of 80 per cent.”

He suggests investors need to make a short-term tactical decision on their entry point, based on returns from other asset classes.

“Interest rates are very important,” he says. “Gold’s major competitor is cash, and cash is paying less than 0 per cent after inflation. One dismissive argument is that gold is supposed to be an inflation hedge and it didn’t work in the 1980s and 1990s – it was all based on performance in 1970s. But while inflation is not strong this decade, it has been stronger than interest rates.”

For investors seeking higher returns over a longer period, JM Finn’s portfolio managers prefer shares in mining companies that have gold exposure and produce a dividend yield. They are watching Freeport McMoRan, the US gold and copper miner, with a view to buying on price weakness.

“For a diversified portfolio, Freeport’s shares have run up recently, but when they’re down, look at it,” advises Edgedale.

Alternatively, he suggests that private investors use an actively-managed fund, such as BlackRock Gold & General.

“If you want to get exposure to gold and mining, BlackRock makes perfect sense – it’s a very good way of getting involved.” says Edgedale.

“But buy on a low point, not a high point – it has seen a 25 per cent run in recent weeks.”