Simon Read: Keep your precious portfolio away from precarious metal
Saturday 30 April 2011
Gold hit a new all-time peak of $1,532 an ounce this week. Two years ago in these pages I warned investors to be wary of the hype. Then the price of an ounce of gold stood at $910. In other words, anyone who followed my advice and kept well away from the precious metal could well be cursing me now.
But I have the same view now as I did then. Gold does have an intrinsic value but its daily price is driven by sentiment and fear. Its non-stop rise over the past half a decade or so is against a background of falling economies and fluctuating stock markets. Against that, some investors regard gold as a safe haven.
But it's not. Its price can drop as rapidly as it climbs. The actual production cost of gold is nearer $250 an ounce. Anything beyond that is market-driven. The recent soaring price of the yellow metal can be directly related to the downgrading of the US economy and the collapse of the dollar. As global investors flee that, gold is a natural home for their cash.
There is a place for gold in a balanced portfolio, but anyone tempted now to invest should think carefully about why. Sure there could be some more short-term gains to be made, but the metal's rise has to stop somewhere. Will it reach $2,000 an ounce? That's possible, but speculating on that is not for the faint-hearted. An alternative scenario could easily see gold slip back to the $1,000 an ounce level.
In short, avoid the gold-rush and keep to long-term investment plans. If you want to spice up your portfolio, think about some of the emerging economies I write about on pages 60-61. There are arguments for investing in any of those. I don't see the same arguments for backing gold.
Buy-to-let mortgages are reappearing rapidly. Metro Bank and the Yorkshire building society are among a range of lenders looking to offer amateur landlords more tantalising deals. But anyone tempted needs to remind themselves of the harsh lessons of the property market we experienced in the past decade.
The financial argument for buy-to-let mortgages is simple: they allow you to buy a rising asset – a property – while drawing a regular income, namely rent. But as many landlords have discovered to their cost in recent years, property doesn't always rise in value. Worse, if you buy in the wrong area, it can fall, sometimes quite dramatically.
The net result of that is that you can be left paying a much higher mortgage than the property is worth. That negative equity can be bad enough for normal homeowners, but can be a disaster for those who buy property as an investment. It means, in effect, that you can't afford to sell the property.
The other problem affecting landlords is tenants. With the Coalition cutbacks, there are likely to be far more tenants defaulting on rent. As experienced landlords know, getting rid of problem tenants can take months, which is costly as well as annoying. And there is also the problem of void periods, when there are no tenants in the property.
Put the cutbacks and falling property prices together and moving into buy-to-let now looks like a high-risk strategy. As always, if you can buy a good-quality property in a good area at a decent price, then it's worth looking at. But considering buy-to-let because lenders are making it easier to do so is a mistake.
Plastic: Fairer deals for pre-paid card users
New rules coming into force from tomorrow should make pre-payment cards a little better value. The cards can be useful when spending money overseas or for giving cash to children. But until now, card issuers haven't had to refund any money on the cards that remains unused.
That'll change when the second Electronic Money Directive comes into force on 1 May. Under the regulations, pre-paid card issuers – who turn your cash into e-money when filling up your card – will not be able to refuse to repay the full value of any unused e-money if you ask for it within six years from the end of your contract. However, they may be able to charge you a fee for doing so.
Also from tomorrow, all e-money issuers in the UK will have to comply with the Financial Services Authority's complaint-handling rules. It will mean that if you complain to an e-money issuer and are not satisfied with their response, you will be able to take your complaint to the Financial Ombudsman Service.
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