Gold price: Store of value tends to be volatile

Gold prices last week surged to a new high of $1,200 a troy ounce, as investors sought refuge from the weakness in the US dollar.

With prices of the precious metal rocketing, everyone is trying to get their hands on some of it, from the Indian central bank – which is rumoured to be buying another 200 tonnes from the International Monetary Fund – to hedge fund manager John Paulson, who is in the process of setting up a gold-only fund. Even Harrods is getting involved by selling gold bars.

It is easy to see why. The price has risen from $660 an ounce two years ago to recent highs of $1,200, and experts predict it could keep rising.

“The past nine months have seen the popularity of gold soar,” says Barbara-Ann King, head of investments at Barclays Stockbrokers. “The credit crisis triggered a flight to safety from investors and gold’s perceived safety and lack of correlation with equities saw investors flock to it.

“From April this year, the equity market rallies dulled gold’s lustre, but its popularity revived this month on the back of the apparent weakness of the dollar and growing inflation concerns driven by the substantial fiscal stimuli and monetary easing programmes and the price moved into new territory.”

She points out that central governments around the world have reacted by suggesting that gold may become the reserve currency of choice over the dollar, as its value drops compared with other safe havens. “If the value of the dollar drops further, there may be a reverse effect on the price of gold,” she says.

The big question on investor’s minds at present is how gold will perform.

Chris Hossain, senior sales manager, ODL Securities, says: “Luminaries such as Jim Rogers have said we will see $2,000 within the next decade, and it is striking to see that Paulson has announced he is starting a gold-backed fund in the New Year, including $250m of personal investment. Nothing speaks louder than putting your money where your mouth is.”

David Wilson, director of metals research at Société Générale, says: “We expect money to surge into gold exchange-traded funds, which could push the price up to $1,400 and it could well reach $1,500 in the middle of next year.”

It is the sharp upward movement of the past few months that have triggered a rise in spread betting on gold and opened opportunities for investors.

Unlike gold-backed ex­change-traded funds and gold bars, spread betting gives investors the chance to speculate on the price of the metal without having to tie their money up in something physical.

There are two main ways to spread-bet gold.

Long-term traders tend to place bets on futures contracts, which have a set expiration date.

Those looking to take a short-term view, meanwhile, usually place bets on the rolling spot price of the metal. One benefit of spread-betting gold is the ability to deal at just about any time of the day, as gold – like foreign exchange – is a 24-hour market.

At many spread betting firms, gold trades are calculated at 0.1 per US dollar. In simple terms, this means that for every dollar you move, you would either make or lose 10 times your stake.

So if you buy £5 ($8) worth of points and gold moves up $2, you would make £100 (£5 x 2 x 10).

It is this leverage in spread betting that investors like. With gold, most firms permit gearing of as much as 20 times the initial stake.

The flipside of leverage, however, is that potential losses are also not limited to your stake. Mr Campbell gives the example of someone who had sold at £1 a point when gold was at $1,173, when it moved to $1,200, that would have produced a loss of £270.

Angus Campbell, head of sales at Capital Spreads, says that one of the attractions – albeit also one of the concerns – for investors is that prices can drop from one hour to the next.

“Gold is quite a speculative product, so it is prey to volatile moves,” Mr Campbell says. “Within one day last week, gold reached $1,192 a troy ounce and then plunged to $1,137.5.

“So that’s 545 points, which is enough to make someone incur a substantial number of points.”

Investors are advised to take advantage of guaranteed stops and limits to protect themselves against some of the more volatile swings seen in the gold price recently.

Especially in view of the fact that there have already been some reports that jewellery consumption, the traditional backbone of the gold market, is collapsing under the weight of record bullion prices.

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