David Kuo: Gold may glitter – but is it overpriced?

Investment Insider

The price of an ounce of gold is heading back towards its all-time high in June of $1,260.

The dramatic 8 per cent rise in August came amid news that the US economy was showing signs of stuttering. Logic would suggest that the Federal Reserve might pump more dollars into the US economy.

Investors with one eye on inflation are right to be concerned. A flood of cheap money could be a precursor to deep inflation in the US, which could infect other economies. Consequently, it is understandable that they are looking to invest in assets that have proven to hold their value over time. Gold appears to fit the bill perfectly. It is easily stored; it is readily available and it can sit comfortably within any well-balanced investment portfolio. However, there is a problem. It may also be overpriced.

Fans of gold argue that it may still be off its peak. In 1980 it reached a high of $850 an ounce. After inflation, the price of gold could be $2,500 an ounce today. However, the risk of pricing assets from one peak to another is the deep troughs in between when a non-productive asset such as gold will do absolutely nothing.

However, gold investors say that because the cost of holding it is almost zero, it is irrelevant that it is a non-producing asset. After all, if savings accounts are paying next to nothing, then it would be better to invest in gold that has at least a chance of appreciating in value. However, it would be dangerous to ignore two assets that also have good records of beating inflation. They are dividend-yielding shares and rent-producing properties.

Another argument that is often put forward for gold is that it is a limited resource. It is maleable, conductive and inert, a combination that has many uses in industry. When demand increases, the only direction for gold prices must be up. However, it is important to remember some valuable lessons from another limited resource – land. Just because a resource is limited does not mean it cannot be overvalued.

A balanced investment portfolio should include a mixture of shares, property, bonds, cash and commodities (including gold). The easiest way to invest in commodities is through exchange traded funds. ETF Securities Physical Gold is a low-cost way to track the price of gold. Similarly, ETF Securities Physical Silver will track the silver market and ETF Securities DJ STOXX Basic Resources tracks metals mining and processing shares.

However, it is also important to rebalance your investment portfolio now and again. So if you have made healthy profits from gold, now looks like being a good time to lock in some gains. Arguments about whether there is a gold bubble will continue until the bubble eventually bursts. But no one ever went broke taking a profit.

David Kuo is a director of financial advice site fool.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Suggested Topics
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Editor-in-chief - Financial Services - City, London

    £60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Guru Careers: Management Accountant

    £27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

    Guru Careers: Project Manager / Business Analyst

    £40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

    Day In a Page

    General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

    'We will not sit down with Nicola Sturgeon'

    In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
    VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

    How ordinary Britons celebrated VE Day

    Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
    They came in with William Caxton's printing press, but typefaces still matter in the digital age

    Typefaces still matter in the digital age

    A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
    Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

    'Missing link' between Earth's two life-forms found

    New microbial species tells us something about our dark past, say scientists
    The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

    Pan Am Experience: A 'flight' back to the 70s

    Tim Walker checks in and checks out a four-hour journey with a difference
    Humans aren't alone in indulging in politics - it's everywhere in the animal world

    Humans aren't alone in indulging in politics

    Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
    Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

    Ronald McDonald the muse

    A new wave of artists is taking inspiration from the fast food chain
    13 best picnic blankets

    13 best picnic blankets

    Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
    General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

    Miliband's unlikely journey from hapless geek to heart-throb

    He was meant to be Labour's biggest handicap - but has become almost an asset
    General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

    On the margins

    From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
    Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

    'This is the battle of young Egypt for the future of our country'

    Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
    Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

    Why patients must rely less on doctors

    Improving our own health is the 'blockbuster drug of the century'
    Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

    Flesh in Venice

    Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
    11 best anti-ageing day creams

    11 best anti-ageing day creams

    Slow down the ageing process with one of these high-performance, hardworking anti-agers
    Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

    Juventus vs Real Madrid

    Five things we learnt from the Italian's Champions League first leg win over the Spanish giants