Gold
Newton Private Investment Management
January 2010
We have invested in gold for clients in the last few years: this note sets out our rationale for thinking that the price of the yellow metal will rise in future.
The main reason that investors may wish to hold gold is because it has an extremely long track record of preserving the real value of wealth (after all, it predates paper money); it is also portable, indestructible and easily tradable.
Gold had been in a long-term decline between January 1980 (when its price was around $825 per ounce) and 2001 (when its price stood at just above $250). Between 1999 and 2002, Gordon Brown sold more than half of the UK's gold reserves, since when the price has risen strongly, breaking through $1,000 in 2008 and more convincingly in 2009. These price movements illustrate just how volatile the price of gold can be.
There are a number of ways in which to invest in gold, including:
- golden objects (typically jewellery)
- gold coins or bars
- an exchange-traded fund (ETF) that moves exactly in line with the price of gold
- shares in a company that is involved in gold mining.
Investing directly in gold requires a different approach to investing in a share or a bond. After all, such an investment provides no income (unlike bonds and shares) and there is no profit and loss account or balance sheet to analyse in assessing whether the gold price seems cheap or expensive. Gold is simply a commodity whose price will rise and fall. Historically, investors switching from cash to gold suffered the opportunity cost of foregone interest. However, with current interest rates, this opportunity cost is very low.
Investors have generally believed that the price of gold is linked, to varying degrees, to four factors. These are:
- supply and demand for gold products
- the level of the US dollar (a falling dollar is believed to be positive for the gold price)
- inflation (high inflation is believed to be good for the gold price)
- investor fear (fearful investors have generally purchased gold, thereby pushing the price up).
If we look at the above four factors in the context of current conditions, we reach the following conclusions:
- The demand for gold (and other luxury) products is unlikely to rise significantly if the economic recovery is anaemic.
- The US dollar has been strengthening since 2007, but it has weakened recently and long- term weakness could be expected.
The other two factors are more encouraging:
- Inflation has been positive for the gold price because inflation undermines the value of paper money; £100 will buy less 'today' than 'yesterday' during inflationary times. The UK and US governments (and they are not alone) have been printing money in order to buy assets from banks and to ensure that there is sufficient liquidity (money) in the financial system. The printing of this extra paper money is likely to be inflationary in the long term and to mean that paper money will have less value in the future. Indeed, many western governments have made explicit statements that they regard inflation as preferable to deflation. Our view of gold is as much driven by a negative view on the value of paper money as by a positive view on the prospects for gold.
- Finally, investors have endured a dramatic ride in 'risk' assets. While markets have been strong in 2009, the underlying problems of too much debt have not been resolved. As such, further volatility can be expected, at which time the attractions of gold are likely to be remembered.
Attempts to predict short-term movements in the price of gold are likely to go unrewarded, but the worth of gold is as a diversifier in a portfolio of financial assets. For investors with significant monies already invested in risk assets, or assets such as bonds that will be damaged by inflation, a small investment in gold seems advisable.
Philip Collins
Investment Director
Newton Investment Management Limited
Telephone: 0800 917 6594
e-mail:
www.newton.co.uk/privateclients
This is a financial promotion and is not intended as investment advice. Past performance is not a guide to future performance. The value of investments, and income from them, is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment, you may get back less than you originally invested. Issued by Newton Investment Management Limited. Registered office: The Bank of New York Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No.1371973. Authorised and regulated by the Financial Services Authority.
1032 January 2010
