A New Gold Rush?

September 25, 2013 at 09:39

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Gold might be about to jump in value — but that doesn’t mean investors should bank on making a handsome profit.

Fear of inflation has pushed up the gold price in recent weeks, with four of the ten top-performing funds invested in it in August. The best of these shot up 15 per cent.

The turnaround follows three years in which gold investors have been hammered, with the average fund losing half its value in that time. The worst, Junior Gold, has cut a £1,000 investment to just £370.

Experts believe that the recent change in fortune will continue: gold tends to do well when the cost of living goes up.

High inflation means it takes more money to buy everyday goods, so the cash in your pocket is worth less. When this happens, many savers flock to gold as a way to preserve the value of their money. And because its supply is so limited, the more people buy it, the higher the price rises.

With central banks pumping more and more cash into economies in a bid to boost growth, experts predict inflation around the world may soar. The extra money being printed is meant to encourage people to spend — which again pushes up the price of goods.

The U.S. Federal Reserve has just revealed it will not yet slow the amount of money it is printing. With more dollars sloshing around, the value of the currency is watered down.

A weak U.S. currency means gold, which is priced in dollars, is cheaper for overseas investors to buy, making it much more attractive. Indeed, after the Federal Reserve announcement, the price of gold went up by 4 per cent and now stands at $1,317 per ounce.

Think-tank Capital Economics forecasts it could reach $1,530 by the end of 2015.

Even though the U.S. is set to slow the money flow at some point soon, gold may still be attractive because it is seen as a safe haven.

When, for example, the U.S. economy hit debt problems in 2011, the price of gold rose to an all-time high, above $1,900 an ounce. Yet despite these seemingly good signs for gold, it doesn’t necessarily mean that gold investments will pick up, too. This is because most funds invest in shares of companies digging for the precious metal.

Ben Yearsley, head of investment research at stockbroker Charles Stanley Direct, says: ‘Gold equity funds have underperformed even when the gold price was rising, as they were considered to be high risk when investors were clamouring for security.

‘Added to this, many commodity companies have a poor record in using shareholder cash — often doing mergers and acquisitions at the top of the market, rather than returning cash to shareholders via dividends.’

Gold mining funds also tend to do even worse when the price of the raw metal drops. These firms have high production costs, so when the price of gold falls, their profits are hit hard. It can lead to smaller firms going bust and investors facing losses.

BlackRock Gold & General, one of the biggest and most popular gold funds, has dropped 50 per cent in the past three years and 25 per cent in the past six months.

You could argue these falls make gold companies now look very cheap — but there is still a risk they could fall even further. Even though the gold price has enjoyed a recent rise, some funds have still lost as much as 15 per cent over the past couple of weeks.

It is also worth remembering that shares in mining companies are a lot more volatile than gold. Savers can make more of a profit, but also risk suffering a greater loss.

‘If you’re willing to accept the high risks involved, a sensible approach is to invest regular amounts rather than one big lump sum,’ says Yearsley.

Savers looking to invest in physical gold can opt for an exchange traded commodity. These so-called ETCs are a low-cost way of buying gold.

The ETFS Physical Gold product, for example, charges 0.39 per cent a year, although there will be trading costs on top of this. The product invests in gold bars, which are safely stored in a secure vault. This means you can invest in the price of gold, without the worry of keeping gold bars safe yourself.

ETCs are listed on the stock exchange and you can buy or sell them through a stock broker. Savers can hold ETCs in an Isa or self-invested personal pension.