Investing in gold

Gold is considered a safe haven in uncertain times, but will it lose its shine?
 
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01.Gold rush

Gold dollar sign

As shares and property crashed and the world nudged closer to recession, canny investors steadily turned their attention to one of the world’s oldest asset classes – gold.

In the past year, investment markets witnessed a modern-day gold rush; demand from institutional investors increased and consumer demand also rose. Ron Currie, Perth Mint Sales and Marketing Director, says sales of gold coins and other products increased 300% in the six months to March. “People are looking for a safe haven for their wealth rather than being so concerned with making a profit,” he says. “We see people from all walks of life coming into our retail outlet. Some are coin collectors, but many are ordinary working people buying gold.”

In early May 2009 (the time of writing), a gold coin weighing just one ounce cost over $1200. Buying one may seem an odd response to the uncertainty of global financial markets, and it raises a lot of questions. Is gold as safe as it’s made out to be? Could it be the next investment to crash and burn? Or does it really deserve consideration for those looking to build a balanced investment portfolio?

Please note: this information was current as of May 2009 but is still a useful guide to today's market. For more recent information, see our article on Cash for gold 2010.


The pros and cons

Gold has traditionally been seen as insurance against rising inflation, and its value has bucked the trend of declining share and property markets. In the six years to March 2009, the value of an ounce of gold increased by almost 150%. The steepest period of gold’s ascent was between November 2007 and March 2009 (up 55%), when the global financial crises hit and Australian share and property prices nose-dived.

Some financial advisers recommend their clients invest about 10%-15% of their portfolio in gold. And AMP Capital’s Chief Economist, Shane Oliver, notes the real price of gold (adjusted for inflation) is well below its 1980 peak and it has performed better than shares during previous recessions.

However, there are still risks and downsides to investing in gold. Unlike investing in a company’s shares, gold doesn’t do anything – it doesn’t manufacture a product that people need or pay investors a dividend or interest. And, like other commodities, its price is influenced by investor demand. If everyone wants to buy gold, its price will get pushed up, possibly to unrealistic and unsustainable levels.

If gold is insurance against inflation, what happens if we have a period of deflation – when the price of goods and services actually decreases, as is already happening in other economies such as the UK? If we see widespread deflation, the inflation rationale for investing in gold becomes irrelevant.

The fear for gold is that it’s now in a speculative price bubble. Its price graph looks a little like shares before they started their dramatic decline in November 2007. If you’re seriously considering gold, do your homework, consider getting advice and don’t invest everything. Gold is a very speculative and at times volatile investment which may lead to big losses or big gains, depending on when you buy and sell and a range of economic factors.

How to invest in gold

  • Coins and bars can be purchased from outlets such the Perth Mint. Expect to pay a premium if you buy in small amounts. The Mint, a state government statutory body with an AAA credit rating from Standard and Poor’s, also sells gold bullion certificates and can store the physical products for you.
  • You can also invest in gold stocks through an Exchange Traded Fund, which is like a share bought and sold on the Australian Securities Exchange. For more information, go to Australian Securities Exchange and search for the code ‘gold’, or visit the website ETF Securities.

Number crunch

  • 700% The increase in the value of gold between the mid-1970s and January 1980.
  • 57% The fall between January 1980 and June 1982.
 
 

 

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