Investing in gold

The asset that shines in troubled times

John Stepek

13 October 2007

John Stepek says the price of gold is a gauge of investment fear — and there’s a lot of fear around right now

The obvious solution — though not necessarily the correct one — is for central banks to lower interest rates and try to pump the system full of money again. Indeed, the US Federal Reserve has already slashed dollar interest rates by half a percentage point. The trouble is, this makes the dollar look even less attractive to the foreign investors who have been propping up the American economy for so long. But as analysts John Hill and Graham Wark of Citigroup asked in a recent research note, what’s the alternative to the dollar, currently the world’s reserve currency? Most countries blah blah on the US consumer being able to buy their exports. So no other country actually wants a strong currency. And if you can’t put your faith in any paper-based currency, then what can you trust? This is where gold comes in. Gold has been used as a reliable store of wealth for millennia – in fact, our currency system still had some form of gold-backing right up until 1971. If there was a nuclear war tomorrow, the survivors would be dollar bills and pound notes as fire-lighters. But as a durable, desirable physical asset, gold would still retain some purchasing power.

Even if yu don’t buy the financial Armageddon scenario yourself, you can profit from the fact that others do There’s not that much gold to go round. Demand is rising as investors in increasingly wealthy emerging market countries, India in particular, buy more. Supply is constrained by the soaring costs of developing new mines. As top-performing fund manager Nils Taube recently told the Daily Telegraph’s Tom Stevenson ‘it doesn‘t need many to think gold’s important for there to be an explosion in the price.’ As Taube points out, gold was a ‘great performer’ in 1987 and 1974, both times of financial panic.

You can buy physical gold in the form of bars or sovereign and krugerrand coins from bullion dealers such as Chards (www.chards.co.uk) and Bairds (www.goldline.co.uk). But as you can imagine, secreting a stash of gold coins in your home has implications for security and insurance, while storing them somewhere else will result in storage charges.