Friday January 18, 05:35 PM
Bullion is on a bull run
By Ellen Kelleher
The start of the year has brought a gold rush. The spot price of the precious metal hit $914 an ounce early this week as nervous investors purchased bullion to protect themselves against a weak US dollar and the downturn in the economy. The
flight to gold looks enticing these days. If trouble in the credit markets persists, the dollar slides further, the price of oil climbs higher and central banks cut rates, analysts predict the cost of gold could move beyond $1,000 per ounce in the first part of the year as more investors look to protect their portfolios."There's a very bullish sentiment in the market about gold," says David Holmes, director of precious metals at Dresdner Kleinwort. "On the whole, the stars are very much aligned for it. It's not out of the realm of reason at all that gold will hit $1,000 in the first quarter." Since January 1, gold-backed exchange-traded funds, run by Exchange Traded Gold, an initiative of the World Gold Council, have attracted $870m - with private investors contributing 70 per cent. "Accessibility has been the key driver for gold ETFs," says Owen Reese, principal marketing adviser for Exchange Traded Gold. "They are very easy for retail investors to understand and they are quite liquid. They also eliminate country risk and management risk." The eight largest gold ETFs now hold about 795 tonnes of gold - more than the official bullion reserves of the European Central Bank. While investors appear enthusiastic, some analysts are more cautious about the run-up in the price of the metal, which back in 2001 was trading at $250 per ounce. Joachim Klement, a UBS (Virt-X: UBSN.VX - news) metals analyst, believes the cost of gold has reached a "precipitous" level and he suggests taking profits now and buying again when it falls to a range of $780 to $820 per ounce. "We expect the dollar to regain strength in the short-term, which is likely to put pressure on the gold price," Klement said in a recent note. Gold is benefiting as more investors look to diversify their assets away from equities in the face of volatility. And while demand for jewellery may have stalled in Asia, consumption of it remains strong in the Middle East, where oil money continues to fuel spending on luxury items. Declining output from mines in South Africa will also help support spot prices. Gold has outperformed the FTSE 100 (news) in the short and long-term, reporting a 107.3 per cent return over three years while the index rose just 43.4 per cent. Over 10 years, its return was 201.9 per cent while the FTSE's was 82.3 per cent. Demand has soared as investors have sought refuge in exchange-traded funds, which track the metal's spot price, precious metal funds, options, riskier futures contracts - which offer leverage, bullion-backed certificates, mining shares and coins and bars. An advantage of the sixteen or so ETFS, which made their debut only in 2003, is that they are quite liquid, permitting buyers to take advantage of fluctuations in price. A competing option is to buy into the handful of more diversified resource funds, which invest in bullion, mining companies in Australia and South Africa and other metals. In the last six months, these funds have reported strong returns with BlackRock Merrill Lynch's Gold and General (3166.KL - news) fund up 40 per cent and Investec's Global gold (GBGD.OB - news) fund up 29.9 per cent, according to Morningstar (NASDAQ: MORN - news) . Ian Henderson of JP Morgan Asset Management's Natural Resources fund, is one of a number of managers who sought to increase his exposure to gold in recent months, moving the allocation from about 20 per cent of his portfolio to 37 per cent. "Our exposure to gold has been a bit of a godsend this year," he says. That godsend has provided a total return on the year to date on the FTSE Gold Mines index of 8.1 per cent. Over one year the return has been 42 per cent, while anyone who bought into gold mining shares three years ago would be enjoying a return of 104.3 per cent. Bars and tradeable coins such as krugerrands and sovereigns can also be bought and sold through dealers. The most liquid bars to trade are Good Delivery bars, sold off by central banks which can be put into a self-invested personal pension (Sipp). The internet has opened up the market for smaller amounts of gold to be traded more easily with groups such as Bullion Vault (www.bullionvault.com) and ATS Bullion (www.atsbullion.com) acting as marketmakers. Storage in physical gold accounts at banks in the US and Switzerland can also be arranged for those with millions of pounds in assets. A typical management fee of 1 per cent per year will be levied for the storage of £10,000 or more of gold in a Swiss account. "Some people in Europe like the idea of being closer to their gold and beingable to access it if they wish," says Steven Flood, director of Gold and Silver Investments. Lastly, investors could consider a scheme offered only by the Perth Mint in Western Australia (www.perthmint.com.au) to purchase aaa-rated gold certificates, which can be put in a Sipp. There are no ongoing costs for storing the gold - instead, $50 is paid per certificate and there is a one-time charge of 2 per cent above the spot price, according to Mr Flood.
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