Surging gold prices reach pivotal point

Gold, snubbed by investors for more than a decade, made a spectacular comeback in 2002. Bullion prices climbed steadily from about $280 (€268.6) an ounce last August to highs of more than $345 in December.

But while analysts agree the rally is based on sound fundamentals, such as less producer hedging, volatile stock markets and a weak dollar, there is uncertainty about how much higher bullion can go.

"Gold has reached a pivotal point," said investment bank JP Morgan last month. "It will either stall at the major $350 resistance area, signalling that the three-year range and the 15-year downtrend is intact, or will blast higher, sustaining its recent gains."

Gold's proponents argue it is a useful portfolio diversifier at times of stock market upheaval as it tends to move in the opposite direction to shares and bonds. Unlike most financial assets, it does not represent anyone else's liability.

For those who favour gold as a hedge, the most direct exposure comes from coins or bars. Unlike Asia, which has a highly efficient gold distribution network, the US and Europe have only a few dealerships. In the UK, outlets include Gold Investments, ATS Bullion and Baird & Co.

Mr Mike Temple, a director of Gold Investments, has seen a rise in business from stockbrokers and financial advisers whose clients have asked to put money into bullion. Coins or bars can be delivered to the client, who might keep small amounts at home or store them. Gold Investments charges about 0.75 per cent a year for storage. The alternative, usually for amounts of more than 100 ounces, is an unallocated account. Clients receive certificates but no bars or coins are allocated to them.

The mark-up on unallocated gold is about 2 per cent, while the turn on physical bullion is about twice that because of manufacturing costs, security and delivery charges. Smaller investors often opt for coins, the most popular being the 22-carat krugerrand. Smaller bars and coins offer less value for money because of fabrication costs.

Mr Temple says that if you expect gold to rise "you need to ask what interest rates you would get if you put your money into the bank and your tax burden on that interest rate. One would hope that gold would make a steady rise above that rate and perhaps do better."

Gold bullion is tricky to get in the Republic. The Central Bank of Ireland holds just €62 million of gold and that is on paper only.

Irish investors can contact dealerships in the UK and order gold bars and coins, says Mr Temple. Some Irish banks with UK operations will recommend that investors buy bullion from the dealerships, such as Gold Investments, either directly or through the bank, he says. The margins on bullion gold are not that high, Mr Temple adds, and a bank will charge commission for the purchase. But some investors may prefer to buy through a bank for security reasons. The dealership has shipped small amounts of allocated gold to investors in Ireland but secure delivery is expensive.

There are other more profitable and more risky ways to invest in gold. Gold shares offer amplified exposure to gold. Between January 1st and June 4th, bullion rose 18 per cent in dollar terms. Shares in Durban Roodepoort Deep on Nasdaq shot up by 305 per cent.

But the firms that do best in a rising market - high-cost producers whose profit margins are highly sensitive to price movements - are also the most exposed to falls in the price. Unit trusts offer a more diversified approach. Merrill Lynch Asset Management's Gold and General Fund rose 80 per cent in sterling terms the year to December 19th, compared with a 14 per cent rise in the sterling price of gold.- (Financial Times Service)