The carat and stick approach to investment
Gold remains the most coveted metal in the world and prices are as high as they’ve ever been – but is it a good investment or a bubble waiting to burst?
GOLD? SERIOUSLY? Are things that bad?
Yes and no, but mostly no.
At the height of the economic uncertainty last year, when there were persistent murmurs about the collapse of the euro – and in some quarters – the collapse of capitalism, Pricewatch heard a story of a couple in their 30s who withdrew all their money from a UK bank and bought a large bar of gold which they stored in their house in a London council estate. Whatever about buying the glittery stuff, storing it under your bed is never a good idea. If, however, you are smart about how you buy it and where you put it and when you sell it, gold can make sense, particularly if you like rollercoasters.
Really. The oil crisis of the 1970s and the shambolic end to the Carter presidency in the US led to a goldrush the like of which had not been seen since the Klondike – when economic times are tough money always rushes to gold. After many months of frenzied speculation throughout 1980, prices hit a peak of $850 per ounce – around $2,200 today when adjusted for inflation.
Then Ronald Regan entered the White House and the price of gold went into freefall. By June 1982 it cost just $296. The crash was followed by a two-decade long bear market which kept prices depressed. Gold was written off as a “barbaric relic”, but almost as soon as the death notice appeared, it started to climb in price. In the autumn of last year, at the height of the Greek financial crisis, it went over $1,900 an ounce.
How much does it cost now?
In the middle of last week, an ounce of gold on the New York Stock Exchange cost $1,662 which is undoubtedly high. However some commentators say it could reach $2,000.
Seems expensive; is it value for money?
According to some (admittedly fairly unreliable) information often used by pop economists, at the time of Julius Caesar, a good quality toga cost an ounce of gold. By that reckoning, an ounce of gold should probably cost the same as a good quality man’s suit today – or anywhere between €800 and €1,200.
Another suggestion – that is perhaps equally apocryphal – is that in Biblical times an ounce of gold could buy you 300 loaves of bread. A large Brennan’s bread sliced pan costs €1.58 in Tesco right now suggesting that by that measure, the correct price should be around $600 an ounce.
The reality, however, is that gold has no actual value and is only worth what people are willing to pay for it, or to quote Willem Buiter, a former professor at the London School of Economics, its positive value is based on “nothing more than a set of self-confirming beliefs”.
How could I tell if it was a bubble?
In 2007, more than 80 per cent of the demand for gold was for jewellery and industrial use, while less than 20 per cent of demand was from investors. By 2009, this had changed dramatically. Investment demand had risen to 43 per cent of the total. The rise in demand from investors raises the question as to whether speculation is a key driver of the gold rally.
How would I even go about buying gold?
Gold certificates are popular. You may not get your hands on the gold, but you do have a cert asserting that you own gold, the most commonly traded certs come from the Perth Mint which are guaranteed by the Australian government and are triple-A rated.
Allocated and unallocated accounts are also a way to buy gold. The former sees actual gold with your name on it stored in a vault owned and managed by a recognised bullion dealer. Storage and insurance fees are charged which do eat into reserves. With unallocated account, you don’t get a specific hunk of gold bullion so there is no storage or insurance charges, but then again, you don’t have the gold either – just the promise of it.
Gold stocks are not gold either but shares in companies looking for the stuff can be a very shrewd investment if things go well. Or a very stupid one if things go badly. When gold price rises, profits of mining company do too, as does their share price. Be warned, however, that gold shares are volatile and high risk. If you don’t want to select individual shares, you can spread the risk by investing in collective investment funds which specialise in gold mining companies. You can chose from mutual funds, open-ended investment companies, closed-end funds, unit trusts There are also gold futures which trade on international exchanges. And exchange traded funds (ETFs) which are a popular way of incorporating gold into a personal investment portfolio.
Alternatively, you can go for the real deal. There are several dealers selling gold bullion to Irish buyers, both in the form of coins and bars. Buying investment-grade gold bullion for investment is stamp-duty free and tax free under the EU Gold Directive of 2000. Older and rare coins can also be bought but not just for their precious metal content but their rarity and their historical or aesthetic appeal. They sell for more than regular coins because of the added rarity factor. The most widely traded older coin is the British Gold Sovereign
One of the new kids on the block is bulliondirect.ie. Set up just over a year ago, the company sells one-ounce coins from South Africa, the US and Canada, as well as gold bars. The company is based in Galway and is owned by Niall Marren. He says customers tend to have done their research in advance and know what they want.
They are using the gold investment to hedge against weakening currencies and protect their savings. “As with any investment there is a risk of market deflation,” he concedes. “But the buying power of gold has remained consistent throughout history. An ounce of gold may have cost $150 dollars in the 1970s but $150 then would have had the same buying power as $1,500 now. An ounce of gold will always be an ounce of gold.” Another company which is now selling gold bullion into Ireland is yourgoldfund.com.
So will I buy?
Callum MacPherson works with Investec in London, and while he reluctant to crystal-ball gaze, he is not against the idea of investing in gold – particularly if gold only forms part of an investment portfolio. “It is worth what people will pay for it and it does have scope to go higher. There is a lot of risk still in the global economy and any problems are very likely to push gold higher,” he says.
What would Warren do?
Some gold dealers are incredibly precious and aggressive in talking up their products. And good luck to them. Warren Buffett is one of the world’s wealthiest men and knows a thing or two about making money. He doesn’t like gold. He has famously said it “gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”