When a huge gold-plated statue of a sausage was unveiled in the small Russian town of Novokuznetsk, it seemed final proof the world had gone crazy about this most precious of metals.
The salami sculpture was in fact a tribute to the town’s favorite food, but the taste for gold is universal, with the price up 54 percent in two years, according to the World Gold Council (WGC).
Last week, spot gold touched US$1,343.90 an ounce — an all-time high — with bulls forecasting it could top US$1,500 by the end of the year.
Illustration: Yusha
Gold has always been seen as a safe haven for investors at times of economic uncertainty, so it should come as no surprise that, following the dotcom bust and the financial crisis that broke in 2007, its price has rocketed. However, gold’s bull run goes back even further and since 1999 the price has risen more than 430 percent.
It was in 1999 that then-chancellor of the exchequer Gordon Brown dumped half of Britain’s gold reserves at an average selling price of US$248 an ounce. With hindsight, this looks like an awful mistake — these days central banks are net buyers of gold after a 15-year selling spree.
Fears about the future are driving the price higher, says Marcus Grubb, managing director of the WGC, as worries mount about sovereign debt, currency devaluation (particularly the weakening of the dollar) and a double-dip recession grip world markets.
Grubb says investors believe the US and possibly the UK are about to embark on another round of quantitative easing, pumping money into the system to prevent deflation, but setting the scene for inflation, as ultimately there will be too much money chasing too few goods.
“Gold is a hedge against inflation, but is also being used as a defense against deflation as countries are devaluing their currencies to boost exports to get their economies back on track,” Grubb said.
Last week, IMF managing director Dominique Strauss-Kahn warned of a currency war if countries manipulate their exchange rates to solve domestic problems. His comments echoed those of Brazilian Finance Minister Guido Mantega, who said that exchange-rate conflict threatened the global financial system.
“Gold is being lifted by two important factors — fear that the currency system is unraveling, and that more quantitative easing will set the stage for inflation down the line,” one analyst said.
A third factor is that currencies are being debased in the developed world, where sovereign debt is at record levels and bearish commentators fear the dollar could slump 20 percent in the next two years. The picture could be worse for countries on the European periphery such as Greece, Ireland and Portugal.
However, while the US and the UK are debasing their coin to alleviate the pain of recession, China is holding its currency down (to the fury of Americans) to ensure its huge manufacturing output can be sold cheaply in world markets. Last week, Chinese Premier Wen Jiabao (溫家寶) confessed that a 20 percent rise in the yuan would threaten China’s social order.
“I can’t imagine how many Chinese factories will go bankrupt, how many Chinese workers would lose their jobs [in the event that China revalued],” Wen said.
Given this currency turmoil, it is easy to see why gold has become so popular. China itself accounts for 42 percent of global demand, the WGC said.
But how much further has gold got to go? Here, opinions differ widely.
George Soros, who made millions betting against the British pound before it was forced from the European exchange rate mechanism in 1992, described gold as the “ultimate bubble.”
“Gold may go higher, but it’s certainly not safe and it’s not going to last forever,” he said.
Veteran US investor Warren Buffett is also skeptical about gold, saying it is unlikely ever to interest him as a home for his money.
“Gold gets dug out of the ground in Africa or some place. Then we melt it down, dig another hole, transport it half way round the world, then bury it again and pay people to stand around guarding it,” he said.
However, hedge fund manager John Paulson, who scooped US$4 billion by shorting the US housing market in the run-up to the credit crunch, is a goldbug with about 80 percent of his assets in the metal or backed by gold-denominated shares. He is also a big investor in gold-mining companies, with a 12 percent stake in Johannesburg-based AngloGold Ashanti and a large holding in Kinross Gold.
Paulson said the gold price could hit US$2,400 an ounce following monetary expansion by the US Federal Reserve, and as high as US$4,000 based on a projected overshoot.
Here is what Paulson sees coming: low double-digit inflation by 2012, killing the bond market, and restoring strength to equities and gold; US economic growth capped next year and 2012; a weak US housing market; currency mayhem; and continued dollar weakness as Washington struggles to tackle its debt.
However, Joel Kruger of the currency group Daily FX said he would not recommend gold at this price. And he reminded investors that gold pays no interest, income or dividends, meaning that you are relying solely on capital growth.
That has not stopped wealthy private investors piling into gold. Tony Dobra at Baird & Co, the London-based gold supplier, said turnover doubled last year to more than £300 million (US$477.99 million) and was already at that level by the end of last month — which means a bumper this year.
“Gold bars weighing between 100g and 1,000g are very popular at the moment, but we also deal in bars that are quite a bit heavier,” Dobra said.
UBS is advising high net worth clients to hold 7 percent to 10 percent of their assets in precious metals.
“Fears of a double-dip downturn have boosted the appetite for physical bullion as well as for mining-company shares and exchange traded funds [which are backed by physical gold],” UBS -executive Josef Stadler said.
Deep beneath the Swiss Alps, nervous Germans are storing gold in former military bunkers. Mindful of the hyperinflation that wreaked havoc in their country during the 1920s, German investors have been at the forefront of gold purchases in Europe. Many of them are keen to store the precious metal outside banks, which have been distrusted since the onset of the credit crunch, and Switzerland is cashing in on those concerns. Old military bunkers in the Bernese Oberland now serve as maximum-security vaults.
However, it is not just investment funds and retail investors that are pushing the gold price higher. Central banks have been piling in, too: China, India, Brazil and Saudi Arabia have been bolstering their stocks, not least as a hedge against the falling US currency — most of China’s reserves are denominated in dollars.
For years, central banks were net sellers, accepting the assumed wisdom of the time that it is more profitable to hold sovereign debt instruments, with their steady returns, than non-yielding gold.
That philosophy has been turned on its head. The sovereign debt crisis, the declining strength of the dollar and currency wars give credence to Grubb’s assertion that “gold is a store of value in the long-term.”
Intriguingly, he said gold would be trading at US$40,000 an ounce if the dollar were still pegged to the gold standard, as it was prior to the collapse of the Bretton Woods fixed exchange rate agreement in 1971.
Few believe gold will reach those levels again, but bulls said Asian central banks could become big buyers, not merely to shield themselves against the weak dollar, but also because of gold’s intrinsic worth. They said countries such as Brazil and China have only about 5 percent of their reserves in gold bullion, compared with 50 percent in parts of Europe.
However, a sudden shift by central banks is impossible, as global supplies of gold are limited. China, for instance, holds only 1.7 percent of its global reserves in gold; to increase that to 15 percent, it would need to buy 8,000 tonnes, or 110 percent of last year’s total global output. So any lift in China’s exposure is likely to be gradual.
Bears warn that the price could tumble if economic recovery and financial stability take hold, but that looks a long way off from where we are today, so the bulls are in the ascendant.
For now.
Gold: the facts
Gold is so rare that the world pours more steel in an hour than it has poured gold since the start of recorded history.
The amount of gold left underground could be running out. At the end of 2005 the big gold producers calculated their reserves at 22,000 tonnes — or 14 years’ production. In reality, it is likely to be more, as new reserves are discovered.
One tonne of gold, in a cube, would have sides 37.27cm long.
The largest gold nugget found was the “Welcome Stranger” discovered in Australia in 1869. The nugget, measuring 25x63cm, yielded 70kg of pure gold and was found just 5cm below the ground.
A standard gold bar is called a London Good Delivery Bar. These bars weigh 400 troy ounces, or 12.25kg.
Central banks around the world hold about 12 percent of their reserves in gold.
The Olympic gold medals awarded in 1912 were made entirely from gold. Now the medals are covered in just 6g of gold.
Every year about 70 tonnes of gold are used for dental work.
About two-thirds of annual gold supply comes from mining, with 20 percent coming from scrap.
The rest is bullion kept in central bank vaults.
The “spot price” of gold is the price of one fine troy ounce “deliverable in London in a form that conforms to London trading standards,” in US dollars.
The US has the biggest hoard of gold, followed by Germany and the IMF.
How to buy gold
The Observer, LONDON
Anyone can walk into a gold dealer, buy a Krugerrand for about US$1,433 and walk off. However, professional investors usually prefer to speculate in physical gold through Internet sellers (from just US$47) or through a new instrument called an exchanged traded security, from just US$1.60 a share. Much of the UK’s privately owned gold (believed to be Europe’s biggest hoard) is in an HSBC vault in London’s Docklands (it won’t say exactly where).
Britain’s biggest bullion dealer is BullionVault, an online-only operation with vaults in London, New York and Zurich. Buyers can purchase just a gram of gold for about £27 (US$43) and the first gram is free on signing up.
Buyers are in effect taking part-ownership of a 400 ounce gold bar (you can buy a whole one for US$500,000), which allows access to wholesale-style prices when dealing. The firm has 20,000 traders and stores 21 tonnes of gold, about 75 percent of it in Zurich, Germany.
ATS Bullion, by the Savoy hotel in London, said over-the-counter sales are booming.
“It used to be the very well-off only, but now it’s more the man on the street. Krugerrands are the most popular. They come in one-ounce coins, at £892, or half-ounce coins at £485,” director Sandra Conway said.
However, if you were to sell a one-ounce Krugerrand to ATS, you’d only get £827: Conway said there was normally a spread of about 7 percent between the buying and selling price, so the gold price would have to go up 7 percent before investors see a profit.
The “Britannia” is the Royal Mint’s equivalent to a one-ounce Krugerrand, and was selling last week for £917. The higher price reflects the fact that, as it is issued by the Royal Mint, it’s a coin like any other, so there is no liability for capital gains tax if you sell it for a profit, whereas profits on Krugerrands are liable for CGT. Another anomaly is that there is no VAT (a sales tax) on investment gold, but VAT is levied on silver and platinum.
ATS will sell you a kilo bar of gold for £28,000, but you must prove to their satisfaction that you are not attempting to launder money.
Exchange traded funds are a cheap new way for small investors to access a range of assets, from indexes such as the FTSE 100 through to heating oil. Gold ETFs invest in physical gold, and shares in the funds can be bought and sold just like any other share. A stockbroker can buy on your behalf. The fee is 0.39 percent, but there is no stamp duty and the shares will track the physical gold price. Your gold is held in HSBC’s vault. ETFs have grown rapidly and now represent a very liquid market. If your ETF contract manager goes bust, assets are ring-fenced and monitored by an independent manager.
These invest in shares of gold-mining companies rather than physical gold. The oldest and biggest, BlackRock Gold & General Fund, is up 29 percent this year and 202 percent over the past five years. The minimum investment is just £1,000. There are surprisingly few other gold funds: Investec Global Gold and Smith & Williamson Global Gold are far smaller. To search funds, try trustnet.co.uk.
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