Still worth taking a shine to gold

The precious metal may have lost some of its lustre as investors rediscover their taste for shares – but don't write it off just yet

Is gold about to lose its shine? For a precious but pretty useless metal with few applications beyond the spheres of jewellery and investment, it has been in hot demand for the past 12 years. As the Chancellor, George Osborne, never tires of pointing out, Britain missed the start of a decade-long bull market in gold because his predecessor, Gordon Brown, decided to sell about 60 per cent of the UK's reserves soon after Labour took office.

He sold off 470 tons at an average of $250 an ounce, close to the bottom of the market. Today, it trades at $1,648 an ounce, and it hit a record high of $1,920 in August 2011 when the latest storms in the eurozone crisis sent investors scurrying into safe havens.

As a store of wealth, gold doesn't offer any returns – usually making it an unattractive investment – but it looks appealing when countries appear to be teetering on brink of bailouts or default, and is also the traditional hedge against inflation. The industry-funded World Gold Council (WGC) estimates Mr Brown's disastrous decision cost the UK around £20bn as the price of the metal soared higher. But the council's latest study of the market found that demand actually fell last year for the first time since 2009, by 4 per cent to 4,405 tons – even though, measured by value, trading hit an all-time high of $236bn (£152bn). Meanwhile, the price is down 1.4 per cent so far this year after posting its biggest quarterly drop since 2008 in the last three months of 2012. Analysts at Credit Suisse and Goldman Sachs have forecast a turn in gold's bull cycle this year. Is the precious metal's run coming to an end?

The recent bullish run in stock markets, underlined by the FTSE 100 index's best January for 24 years, suggests so as investors regain their appetite for risk, and seek to sink their cash into dividend-bearing shares. Thanks to the explicit pledges of support from the European Central Bank, the sovereign debt of eurozone strugglers such as Spain and Italy have also been snapped up this year. "Gold prices will continue to struggle to regain investor confidence as cautious market participants stay away," says the VTB Capital commodities analyst Andrey Kryuchenkov. The Credit Suisse analyst Tom Kendall adds: "Attention is much more focused elsewhere at the moment."

But as central banks including the Bank of England, the US Federal Reserve and the Bank of Japan rely on the printing presses to boost flagging economic performance, other worried central banks around the world have dived into the gold market.

Reserve banks in emerging economies such as China, India, Russia, India and Mexico are seeking to protect themselves against the devaluation of their currency holdings amid simmering tensions over another bout of "currency wars".

Buying by various central banks hit a 48-year high of 534.6 tons in 2012.Marcus Grubb, WGC's managing director, expects the official sector to match last year's buying in 2013, partly because monetary easing by developed countries was undermining confidence.

"Emerging-country central banks regard quantitative easing policies as divisive and believe they affect the value of the assets that they hold – the dollar and euro, for example," he says. "They are diversifying away from traditional currencies and buying gold as a hedge."

Central bank purchases, though massively higher, failed to offset a 12 per cent slump in demand from India last year, the world's biggest market for jewellery. But the WGC puts this down to a blip, rather than the beginning of a downward trend. This is because the Indian government increased import duties on gold to 4 per cent from 1 per cent last year, triggering strikes among jewellers and hitting the market. By the end of the year, India's love of gold re-emerged as demand for gold jewellery rose 35 per cent year-on-year in the final quarter of 2012. Although China suffered an economic wobble (by recent standards) in the middle of last year, the world's second-biggest gold buyer behind India also saw demand recovering again by the end of 2012 despite the first decline in jewellery demand for a decade across 2012 overall.

Although Mr Grubb doesn't predict stellar rises for gold this year, he is far from forecasting the sliding prices that might be associated with recovering equity markets. First, the fundamentals of supply and demand: 4,400 tons were bought last year, but only 2,800 actually mined, with the shortfall made up by recycling.

Then there's the money printing, boosting the prices of all assets, including gold. Mr Grubb adds: "Some people have lost sight of the fact that we are in the middle of a massive economic experiment. This is a new cycle."

Investors may be infatuated with shares for the time being, but the decade-long love affair with gold's lustre could linger on for a while yet.

Start your day with The Independent, sign up for daily news emails
Voices
voices
News
general electionThis quiz matches undecided voters with the best party for them
Arts and Entertainment
Keira Knightley and Matthew Macfadyen starred in the big screen adaptation of Austen's novel in 2005
tvStar says studios are forcing actors to get buff for period roles
News
science
ebooks
ebooksA celebration of British elections
  • Get to the point
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.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Trainee Consultant - Surrey/ South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before