INVESTORS tempted to join the gold rush after the price of the metal reached an all-time high this week have been advised to heed the potential investment risks.
The price of gold reached a peak of $1,058 an ounce on Wednesday after weeks of flitting around the $1,000 mark, as the falling dollar increased the asset's appeal for investors outside the US. And with economic confidence in short supply despite the
relative stability of recent months, some experts anticipate further price increases in the medium term.
Jeremy Beckwith, chief investment officer at Kleinwort Benson, believes that if gold goes through $1,000 convincingly, surpassing even $2,000 would be possible.
He pointed to a growing demand from investors who believe that the only way that governments can support the world banking system is to print more of their own currency.
Tom Munro, director of IFA Tom Munro Financial Solutions, predicted that further price increases would encourage more investors to view gold as an integral part of their investment portfolios. "In uncertain times, investors usually turn to the security of gold, and those with exposure to the best of the funds which invest in the shares of mining companies, or in gold exchange traded funds, have enjoyed significant profits of late."
But like everything in life, investors tempted to make a dash for gold are advised to do so with specific objectives in mind and with an understanding of the limitations of the asset class. Gold is a volatile, high-risk asset that pays no income, while the current high means investors have almost certainly missed out on the biggest price jumps.
On the other hand, said Haig Bathgate, investment director at Turcan Connell, gold offers an insurance policy against inflation and currency risk.
"When paper currencies are being devalued through quantitative easing, gold is perceived as a relative safe-haven asset compared with many developed country currencies," he explained. "Gold also provides an element of inflation protection which is also attractive if, as we expect, the current actions of central banks lead to a rise in prices through inflation."
Gold also holds appeal as a diversification play, added Munro. "The attractions of investing in gold are clear, particularly as part of a diversified investment portfolio, since performance is not correlated to other asset classes."
He cautioned investors to restrict their gold exposure to no more than 5 per cent.So if you remain cautious about the prospects of a recovery and believe gold could give you a valuable hedge, how can you get exposure to it? Here are three of the main paths to gold:
PHYSICAL GOLDBuying gold bars isn't a realistic option for most investors these days. But you can buy a share in physical gold through the likes of Bullionvault (www.bullionvault.com), which allows investors to legally own fractions of bars. The company manages around 18 tonnes of gold, which is stored in depositories in London, New York and Zurich. Coins are another way of holding physical gold, with dealers such as Baird & Co (www.goldline.co.uk) offering access to both bullion and collector coins.
But while gold coins and bullion are the most tangible way to invest in gold, investors need to bear in mind the cost of insurance and storage. And look out for scams – many so-called "rare gold coins" are sold well above their market value and investors have been ripped off in gold coin auctions on websites including eBay.
EXCHANGE TRADED FUNDS The emergence of low-cost ETFs, which track the price of gold, has made gold more accessible for private investors over the past five years.
Munro recommended the ETFX Russell Global Gold Mining fund, which has returned 57.3 per cent over 12 months.
Exchange-traded commodities (ETCs) are a similar option, allowing investors to buy a fund backed by physical allocated metal held by a custodian bank in secure vaults. Each bullion held is numbered and registered against a particular investor.
"There is no risk to the investor if the issuer of the fund was to go bust as the gold is ring-fenced," said Bathgate.
"The fund's price will track the gold spot price, minus in most cases a modest annual management fee."
FUNDSFunds investing in gold mining companies have produced staggering returns in recent years. The funds can be volatile, however, with shares typically more risky than physical gold.
The £1.7 billion BlackRock Gold and General fund, run by Evy Hambro, is up 53 per cent over the past year, but was down by over 20 per cent in the previous 12 months.
Almost as big is the £1.3bn JPMorgan Natural Resources fund, up 30 per cent over the last year but down 36 per cent the year before. This is broader than the BlackRock vehicle, investing in mining companies alongside other industrials and precious metals stocks.
But like shares, gold funds are not a pure exposure to the gold price and there is a significant equity risk.
