Golden Rules

    31 March 2012

    Surely everyone holds gold by now?

    Strangely, they don’t. The price has gone from $250 an ounce to $1,700 an ounce in ten years and the metal is much discussed as an investment option. But that doesn’t mean western investors have actually put money into it. Far from it. We’ve actually put so little money into gold that the value of the world’s largest gold investment vehicle (an exchange-traded fund or ETF) is currently a mere one fifth of the market capitalisation of Apple.

    If gold has gone up so much, isn’t it too late to buy in?

    Probably not, for two reasons. The first is inflation. Quantitative Easing (QE) as practised in various forms in the US, UK, Japan and all over Europe, is no more than a fancy way of printing electronic money, and that is inherently inflationary. It might not be a big deal at the moment (although if you are a pensioner on a fixed income, you won’t see it that way), but one day it will be. Inflation is a function of two things – the supply of money and the speed at which that money moves (its velocity). We are currently getting away with increasing the first at a fairly astonishing speed because the latter is exceptionally sluggish: banks aren’t lending and people aren’t spending so the UK’s money isn’t working as hard as it sometimes does. That will change.

    What might make the velocity of money speed up?


    It might speed up as western economies recover, confidence rises and people start spending again. Or it might do so because non-stop QE makes people nervous about holding their national currencies — after all, surely the more pounds you print, the less each pound is worth — and start trying to swap them for physical assets. Either way, when it happens, people holding hard assets that keep their value even as currencies collapse around them will feel pretty pleased with themselves. I plan to be one of those people.

    And the other reason?

    While we are talking about it more than buying it, other people are doing the opposite: according to a report from the US investment firm GMO, nearly 80 per cent of the demand for physical gold over the past decade has come from newly rich emerging market consumers. That’s 23,200 tons. This is because fast GDP growth everywhere from India to China has meant fast growth in savings, but capital controls mean that many emerging market savers can’t invest abroad. At the same time their deposit rates (like ours) are often below inflation and their stock markets and property markets are too volatile to rely on. So they buy gold — that has been a huge factor in pushing the price up.

    So how can I do as they do?


    Western investors looking to protect their portfolios with gold tend to go for ETFs or gold-related funds. Emerging market consumers tend to buy gold bars and gold jewellery. That way they look good and protect their wealth at the same time. I’ve always tended to wear silver jewellery, but I’m beginning to feel the allure of the yellow metal.

    Where shall I buy my gold?

    Not in a jewellery shop. Buy new and you’ll pay a huge premium over the price of gold and the second-hand price. Instead, if you want to hold gold in the form of jewellery, buy vintage pieces at auction. That way you’ll get value from the gold and from the craftsmanship too.