SMART investors cannot have been duped by the robust performance of the FTSE 100 in recent months. Extraordinarily, the index has remained resolutely strong based solely on less than a dozen multi-billion-pound combines and a coterie of oil and mining conglomerates, none of which seems to represent the broad diversity of the UK's listed corporates.
Neither can it have escaped investors that some listed concerns may not have exercised sufficient prudence. Shareholders, who have been forced to endure near-catastrophic share price declines and are likely to see their dividends slashed this year, a
re now about to be asked to contribute to a rights issue – or alternatively suffer dilution to the value of their shares.
The fact is that equity prices have been savaged – just look at Barratt's share price languishing at 253p, some 77 per cent lower than its 1,135p top, and Alliance & Leicester down by 64 per cent. Also witness Persimmon's shares dropping 60 per cent, and HBOS faring little better with a decline of 56 per cent.
Some of us have sold most of our shares and scuttled for cover, opting instead for savings, deposit accounts or income bonds, having taken full advantage of our annual tax-free ISA allowance. But with shopping basket prices up by more than 9 per cent in the past year and a litre of unleaded nearly 20 per cent above last year's price, being risk-averse by opting for savings, even at the best available rate of about 6.5 per cent, means you are losing money in real terms every year.
However, to those of us who have witnessed market sell-offs on the scale of 1987, the possibility of a short, sharp bear market is certainly not out of the question. So you have been missing a trick if you have been ignoring gold, which can give your investment portfolio that crucial element of hedging.
Investing in gold is heresy in some quarters, but the so-called credit crunch probably has further to run with more unpleasant secondary effects. Against this backdrop, gold's low risk has clear attractions when bank failures and low interest rates make cash a much less attractive alternative.
In addition, interest rates in the US could drop as low as 1 per cent this year, with the dollar still weakening, while rates in the UK are unlikely to change for much of the current year, even though inflation could climb further.
Despite the weak dollar, the US foreign trade deficit is very unlikely to improve, while the fiscal deficit may worsen sharply in view of possible bank bail-outs and lower revenues, especially from the financial and housing sectors.
A combination of all of these factors is argument enough for long-term strength in the gold price. So why, after soaring to just over the $1,000/oz mark earlier this year, did the gold price then retreat rapidly to the present $870 level?
Gold specialists argue that the price was 40 per cent up in the space of a year as a result of panic in the credit markets. But much of the awful news is now in the public domain. So that has also slowed up investor and jewellery demand, while gold mining companies were unwinding their hedging contracts struck at much lower levels.
So, if you are now convinced that a 10 per cent investment in bullion would be sensible in these troubled times, when should you buy? Some experts would tell you to keep your money in that deposit account until later this year, as you may be able to take advantage of prices as low as $750 due to counter-trend rallies in both dollar and equity markets. However, with the price nearly 15 per cent off the top, it must be a good time to go for gold.
• Yuill Irvine is chief executive of Edinburgh-based IFAs Dunedin Independent.
