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Is now the time to invest in gold ?

By Tony Green - Thu 24th Sep 2009

I understand that it will soon be possible to purchase gold bars, about the size of a chocolate bar, from a dispensing machine at an airport in Germany. Is the time right I wonder, for us to sell all our stocks and shares, withdraw our bank deposits and invest in Gold ?

I can clearly remember many years ago asking my then manager the same question only to be told that gold was not a good long term investment because the price never fluctuates and instead of earning interest on the metal you have to pay storage charges. How things have changed ; at that time the price was US$35.00 per ounce and currently is in excess of US$1000.00 per ounce. So should we consider investing any of our hard earned savings into this shiny metal ?

Over the past seven years the value of gold has risen quite dramatically every year and has recently broken though the magical US$1000.00 per ounce barrier; a level only seen in February this year and in March 2008.

Will the price continue to rise or fall back as it has done on the past two occasions ?

There are certainly strong indications that suggest gold will continue to glisten. While the economic outlook remains uncertain, the gold price seems unlikely to drop significantly as the metal is seen as the ultimate haven during global turmoil.

It has also been quite noticeable recently that every time the price dips China appears as a buyer of gold bullion which has the effect of underpinning the price and reinforces the belief that China has fundamentally lost confidence in the US Dollar and is looking to boost gold reserves instead.

Another point of interest is that earlier this year China made it legal for Chinese citizens to make purchases of the yellow metal. As recently as 2002 the private ownership was prohibited in China, with jail being the penalty for it's possession. In fact Beijing is actually now encouraging its citizens to purchase the precious metal through state run media.

China has also built a new vault in Hongkong to store its gold and has arranged for it’s physical gold holdings previously held at vaults in London to be shipped to this new vault. While the movement of gold from one location to another should not affect the price of gold it is possible that it could create a shortage of physical gold in London which could contribute to a higher price.

The recent action by governments to pump billions into their economies in a bid to stave off global depression creates the potential for inflationary pressures down the line. Gold has always been seen as an insurance policy against inflation as it tends to hold its value during periods when currencies are loosing their value in real terms.

So is this a one way bet ? - Certainly not ! - before we all get on a flight to Germany to raid the gold "chocolate bar" machine bear in mind that gold is priced in US Dollars, so if the Dollar weakens significantly against the Pound or Euro this can wipe out gains made on rising gold.

Private investors who are looking for exposure to gold have a number of options:

Simply buy small gold bars or coins and find suitable storage facilities. This is probably one of the simplest ways to invest in that you own the coins or bars and are not exposed to any counterparty risk. You will pay a premium over the “market” price but this should be recovered at a later date when the gold is sold.

One of the cheapest and most flexible ways of owning gold is to open an unallocated gold account where you can buy gold that is stored on your behalf but you do not physically own specific bars, rather like having money in a bank account, but without paying storage charges. However like a bank account your gold is at risk if the bank should fail. It is always possible to request withdrawal or delivery of your gold at any time or it can be sold at prevailing market prices. Normally these accounts require minimum starting deposits of approximately US$8000.00

It is also possible to buy gold from a dealer to be held in an allocated account. In this case the bars are held in a vault on your behalf. Each bar is numbered and identified by hallmark, weight and fineness. This does not carry the counterparty risk of an unallocated account but storage and insurance charges will apply. Again the minimum starting deposits are in the region of US$8000.00

While I feel that there is a strong case for the price of gold to continue to rise which could offer some attractive returns, it has to be remembered that in addition to the possible currency risk, already mentioned, the market price is exceedingly volatile and operated by a relatively small band of professionals. It is definitely not an investment for the feint hearted and probably left for the more serious investors, however if you like the idea of owning your own gold then may well be rewarded for your passion !

Comment on this Blog

So that explains all those annoying adverts on the TV & Radio asking to buy everybody's unwanted gold jewellery !
Paul Lafferty - Sat, 24th Oct 2009