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

News
news
Arts and Entertainment
British author Helen Macdonald, pictured with Costa book of the year, 'H is for Hawk'
booksPanel hail Helen Macdonald's 'brilliantly written, muscular prose' in memoir of a grief-stricken daughter who became obsessed with training a goshawk
Sport
footballLive blog: Follow the action from the Capital One Cup semi-final
Life and Style
food + drink
PROMOTED VIDEO
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

    Recruitment Genius: Web Developer - PHP

    £16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...

    Ashdown Group: Client Services Manager - Relationship Management - London

    £30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

    Recruitment Genius: Credit Controller / Customer Service

    £18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

    Guru Careers: In-House / Internal Recruiter

    £25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

    Day In a Page

    Greece elections: In times like these, the EU has far more dangerous adversaries than Syriza

    Greece elections

    In times like these, the EU has far more dangerous adversaries than Syriza, says Patrick Cockburn
    Holocaust Memorial Day: Nazi victims remembered as spectre of prejudice reappears

    Holocaust Memorial Day

    Nazi victims remembered as spectre of prejudice reappears over Europe
    Homeless Veterans appeal: Homeless in Wales can find inspiration from Daniel’s story

    Homeless Veterans appeal

    Homeless in Wales can find inspiration from Daniel’s story
    Front National family feud? Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks

    Front National family feud?

    Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks
    Woman who was sent to three Nazi death camps describes how she escaped the gas chamber

    Auschwitz liberation 70th anniversary

    Woman sent to three Nazi death camps describes surviving gas chamber
    DSK, Dodo the Pimp, and the Carlton Hotel

    The inside track on France's trial of the year

    Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
    As provocative now as they ever were

    Sarah Kane season

    Why her plays are as provocative now as when they were written
    Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

    Murder of Japanese hostage has grim echoes of another killing

    Japanese mood was against what was seen as irresponsible trips to a vicious war zone
    Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

    Celebrities call on David Cameron to take more Syrian refugees

    One young mother tells of torture by Assad regime
    The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

    The enemy within

    People who hear voices in their heads are being encouraged to talk back
    'In Auschwitz you got used to anything'

    'In Auschwitz you got used to anything'

    Survivors of the Nazi concentration camp remember its horror, 70 years on
    Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

    Autumn/winter menswear 2015

    The uniforms that make up modern life come to the fore
    'I'm gay, and plan to fight military homophobia'

    'I'm gay, and plan to fight military homophobia'

    Army general planning to come out
    Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

    What the six wise men told Tony Blair

    Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
    25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

    25 years of The Independent on Sunday

    The stories, the writers and the changes over the last quarter of a century