Gold presents investors with a quandary

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Gold has lost some of its attraction as a haven for investors following a 25 per cent price drop since the start of the year, taking it to its lowest level in three years.

“Its fall has been a remarkable and painful drop for investors seeking financial protection,” says Adrian Ash, head of research at BullionVault.com. “In the past 45 years we have only had three occasions when gold prices fell harder – in summer 1974, spring 1980 and early 1981.”

He explains that the last two of those three periods marked the early stages of gold’s long-term bear market, which continued for two decades as 1970s’ inflation receded and bond markets rose with equities.

The most recent drop in the price has been triggered by comments from the US Federal Reserve confirming it may start to taper its economic stimulus drive later this year as long as the economy continues to show signs of improvement.

But gold has been heading down since the start of this year, bringing a decade-long bull run to a close. Investor interest in the metal grew during the mid-noughties as exchange-traded products made it easier to own, and the financial crisis in 2008 made them more worried about the global financial system.

Darius McDermott at Chelsea Financial Services says there are two types of investors who buy gold: those looking for genuine diversification in an investment portfolio; and speculators looking to make a quick return.

“It has primarily been the second camp that has been selling gold, with strong outflows from the large gold exchange-traded funds,” he says. “Historically, quantitative easing has led to rising inflation and there are many investors who have been holding gold as an inflation hedge.”

So, is it time to sell, or should investors be thinking about buying?

Mr McDermott points out that gold has been on a long bull run since the late 1990s when the UK sold most of its gold at prices below $300. So, even after the recent falls in price, it is not easy to say it looks cheap on a long-term basis.

However, he makes a strong case for the price going up again over the medium term, pointing to pent-up physical demand from consumers in India and China. Also, he says that many governments still hold the majority of their reserves in US government bonds – if even a small portion of this were to move into gold, it would create strong demand.

“If you hold gold as a diversifier in your portfolio I would hold on,” says McDermott. “But if you are buying for capital growth with a short investment horizon then it may be time to sell.”

Others believe the metal has had its day. Jason Hollands of Bestinvest refers to the well-observed inverse correlation between the US dollar and gold prices as a reason to steer clear, pointing to an expectation that recent dollar strengthening will continue.

Brian Dennehy of Fundexpert says whether investors sell will depend on why they bought in the first place. “If your reason for buying was always suspect, then sell.”

Peter Lowman, chief investment officer at Investment Quorum, suggests that investors should compromise with a small amount of gold in their portfolio. Even that leaves the investor with a challenging decision – whether to buy physical gold bullion, hold as an exchange traded fund, or perhaps a commodities fund.

“Funds can give an investor the opportunity to receive a dividend, alongside potential capital growth, while gold bullion has no income and can be hampered by volatility,” says Mr Lowman.

Adrian Lowcock of Hargreaves Lansdown recommends accessing the asset class through a multi-asset manager such as Sebastian Lyon, manager of the Troy Trojan fund, which holds a big position in the metal. For investors wanting access to gold miners, he suggests BlackRock Gold and General fund.

But investors should be aware that gold funds – and the shares they invest in – have been hammered in recent times, with some falling by nearly 50 per cent over the past three months alone. Even in better times, their correlation with the gold price is variable.


Exchange traded commodities

Falls in the price of gold have been accompanied by heavy selling of exchange traded commodities, with most reporting outflows during 2013.

According to a recent Deutsche Bank report, Gold Bullion Securities and Source Physical Gold each lost more than £50m in one week in June, although ETFS Physical Gold saw a small inflow.

ETCs trade like shares, but give exposure to a specific commodity. Experts recommend choosing a “physically backed” gold ETC which actually owns bullion, unlike a “synthetic” ETC, which mimics gold’s returns using derivative contracts.

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