Investors are blowing hot and cold over the prospects for gold

Central banks have been buying the yellow metal in droves, but is the bubble about to burst? Emma Dunkley investigates

Gold, always considered a precious metal, could be on track to soar in value as miners struggle to find any of it left in the ground. Experts believe "peak gold" has been reached, meaning the amount of the yellow metal still available for extraction is in terminal decline.

Fears over the state of the global economy, along with rising inflation and extremely low interest rates mean more people are likely to pile into gold – pushing the price up even further. Analysts at Capital Economics forecast the price will hit $2,200 (£1,395) an ounce by the end of this year – a massive jump from current levels of about $1,675.

But the metal has been on the rise for the past decade and, with everyone rushing into it, could it be forming a large bubble that bursts the moment interest rates rise and economic growth regains momentum? We take a look at the arguments for and against a bubble, and how you can make money from price swings – in either direction.

IS GOLD IN A BUBBLE? YES

"There is a view the gold price always goes up, and over the past 10 years it has. But over time, it can fall very heavily too," says Patrick Connolly at AWD Chase de Vere.

"If you look at the factors pushing up the gold price – fear of other investments, people looking for security – these are starting to wane."

The moment the economy starts to recover, Mr Connolly says, investors want to take more risk than just sit in gold. "We're already seeing some of this," he says. "This could lead to a lot of people pulling out. Gold isn't as safe as people think – historically, there have been huge swings in the price. Double-digit falls are not unusual, and this could happen again."

What could trigger a price fall?

It's tough to know if the price will tumble, but there are a few warning signs. "When interest rates rise, people will move out of gold," says Caroline Shaw at wealth manager Courtiers. "That's not too far away – possibly at the end of next year. And with equity markets doing so well, people are asking why they aren't invested there instead of gold, which hasn't done as well. So if markets rise even more, gold will suffer."

Another key factor that has driven price over the past few years is the advent of exchange traded commodities, or ETCs for short. These are investment products that trade on a stock market and aim to follow the price of a commodity, such as gold. They allow you to invest in the gold price without having to buy a ingot to store in your house.

But while money can easily flow into ETCs, it can easily flow out, too. "We've been saying that a massive sell-out of ETCs will cause the gold price to go down," Ms Shaw says. "If everyone left ETCs, because they are holding shedloads of gold stored in vaults, the price will slump."

It wasn't that long ago some high-profile hedge fund managers sold a massive amount of gold, pushing the price down. And there is certainly the risk this could happen again.

"If all the big hedge fund investors pulled out, it would trigger something," Ms Shaw adds. "The price of gold could move down a few hundred dollars, especially if there's an increase in interest rates, and the equity market does really well."

'Peak gold' hasn't been reached

If demand drops off, the price of gold will come down, and if production increases, it could come down even further. The view that "peak gold" has been reached is not one subscribed to by everyone. Ross Strachan, a commodities economist at Capital Economics, says that although it is difficult to extract gold in certain locations such as South Africa, this is not the case elsewhere. "Gold production has still been rising on a global level in recent years," says Mr Strachan. "So there's still potential to increase production for a number of years to come."

IS GOLD IN A BUBBLE? NO

On the other side of the coin, some experts believe the price of gold could still keep rising. "I'd question whether gold is a bubble – we've seen it rise since 2001, and there have been periods where it has dropped off but then it has resumed its long-term move upwards," says Catherine Raw, a co-manager of the BlackRock World Mining Trust. "What's driving the price up? People want alternatives to cash. We're in a low interest rate environment, and we think it'll take years to leave this."

At the same time, central banks in the emerging markets are buying gold to fill their reserves, as the value of currencies is being pushed down. Central banks globally sold gold from the 1970s up until 2008 but there was a massive reversal during the recent economic crisis. "Last year was a record one for central banks buying gold," says Ms Raw. "Their buying represented 12 per cent of overall demand. So this is a huge change."

Bradley George, the head of commodities and resources at Investec Asset Management, believes that we have reached "peak gold", so production is now irreversibly falling.

"You're not getting any more primary gold supply," Mr George says. "Recently, there have been some big mining companies pulling back on projects – we passed the peak gold supply in 2011. So this helps to keep the price up. There is still incentive to hold gold in 2013 and 2014 where low interest rates exist."

He forecasts that the gold price will rise to $1,825 this year, then to $1,900 in 2014.

RISING PRICE

An easy way to invest in gold is through exchange traded commodities (ETCs). As they are not run by a fund manager, they are also a lot cheaper than traditional funds. ETF Securities Physical Gold is one of the most popular products available. You can also buy funds that invest in shares of companies that mine for metal. Darius McDermott of Chelsea Financial Services recommends the BlackRock Gold & General fund and the Investec Global Gold fund. "Both have specialist, experienced and well-resourced teams," he says.

FALLING PRICE

There are ways to make money from a falling gold price but they can be risky. "Short gold" ETCs aim to make money when the price goes down. However, it's not always the case that if the price goes down, you will mirror that amount by making money – you could still lose it.

AWD Chase de Vere's Patrick Connolly says investors could simply move into equities, which are likely be rising if gold is falling.

Emma Dunkley is a reporter for citywire.co.uk

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Arts and Entertainment
Brendan O'Carroll as Agnes Brown in the 2014 Mrs Brown's Boys Christmas special
tvCould Mrs Brown's Boys have taken lead for second year?
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
news
Sport
Chelsea midfielder Cesc Fabregas
footballChelsea vs West Ham live kicks off coverage of all 10 of Boxing Day matches
News
peopleIt seems you can't silence Katie Hopkins, even on Christmas Day...
PROMOTED VIDEO
News
i100
Arts and Entertainment
Jack O'Connell stars as Louis Zamperini in Angelina Jolie's Unbroken
film review... even if Jack O'Connell is excellent
Arts and Entertainment
Madonna is not in Twitter's good books after describing her album leak as 'artistic rape and terrorism'
music14 more 'Rebel Heart' tracks leaked including Pharrell Williams collaboration
News
news
Arts and Entertainment
Wolf (Nathan McMullen), Ian (Dan Starky), The Doctor (Peter Capaldi), Clara (Jenna Coleman), Santa Claus (Nick Frost) in the Doctor Who Christmas Special (BBC/Photographer: David Venni)
tvOur review of the Doctor Who Christmas Special
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    The Jenrick Group: Night Shift Operations Manager

    £43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

    SThree: Trainee Recruitment Consultant - LONDON

    £20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

    Day In a Page

    A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

    Christmas without hope

    Gaza fears grow that conflict with Israel will soon reignite
    After 150 years, you can finally visit the grisliest museum in the country

    The 'Black Museum'

    After 150 years, you can finally visit Britain's grisliest museum
    No ho-ho-hos with Nick Frost's badass Santa

    No ho-ho-hos with Nick Frost's badass Santa

    Doctor Who Christmas Special TV review
    Chilly Christmas: Swimmers take festive dip for charity

    Chilly Christmas

    Swimmers dive into freezing British waters for charity
    Veterans' hostel 'overwhelmed by kindness' for festive dinner

    Homeless Veterans appeal

    In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
    Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

    'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

    Yazidi girls killing themselves to escape rape and imprisonment
    Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

    Ed Balls interview

    'If I think about the deficit when I'm playing the piano, it all goes wrong'
    He's behind you, dude!

    US stars in UK panto

    From David Hasselhoff to Jerry Hall
    Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

    Grace Dent's Christmas Quiz

    What are you – a festive curmudgeon or top of the tree?
    Nasa planning to build cloud cities in airships above Venus

    Nasa planning to build cloud cities in airships above Venus

    Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all