Golden summit or false horizon?

Should you ever buy any investment — a share, a commodity, an acre of land — when its price stands at an all-time high, having risen by half in less than a year? Or does that make you the ‘greater fool’, the greedy investor who buys into the top of the rally? In recent days, the price of the world’s oldest and most universally recognised store of value, gold, has surged to all-time highs above $1,050 an ounce. Have those of us who didn’t buy months ago just missed the bus, or is there further to go?

The gold price has been through three distinct phases during the past couple of years, says Philip Klapwijk, chairman of GFMS, a London-based precious metals research house. Phase one occurred during the first half of 2008, when the price soared to $1,000 per ounce for the first time. ‘Gold benefited considerably from a weak US dollar and very strong commodity prices, including base metals, soft metals and oil,’ he explains. The deepening of the financial crisis later in 2008 ushered in phase two. ‘Initially, this had a very negative effect on gold prices — in spite of the fact that there was considerable “safe haven” demand,’ says Klapwijk. Why did gold prices fall? The strengthening of the dollar and the fall-off in commodity prices were key factors, he says — as was a wave of gold-selling from embattled institutional investors desperate to raise cash fast. Gold briefly dipped below $700 per ounce during this period, a retreat of nearly 30 per cent from the high point in March 2008.

This year, however, gold has bounced back, with prices consistently exceeding $900 per ounce. ‘The first quarter of 2009 saw a very powerful move into gold by investors who were spooked by [central banks’] quantitative easing and massive increases in government fiscal deficits, and worried about the security of their savings,’ says Klapwijk.