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
Arts and Entertainment
Joe Cocker performing on the Stravinski hall stage during the Montreux Jazz Festival, in Montreux, Switzerland in 2002
musicHe 'turned my song into an anthem', says former Beatle
Clarke Carlisle
footballStoke City vs Chelsea match report
Arts and Entertainment
David Hasselhof in Peter Pan
theatreThe US stars who've taken to UK panto, from Hasselhoff to Hall
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Life and Style
Approaching sale shopping in a smart way means that you’ll get the most out of your money
life + styleSales shopping tips and tricks from the experts
newsIt was due to be auctioned off for charity
Coca-Cola has become one of the largest companies in the world to push staff towards switching off their voicemails, in a move intended to streamline operations and boost productivity
peopleCoca-Cola staff urged to switch it off to boost productivity
Sir David Attenborough
environment... as well as a plant and a spider
'That's the legal bit done. Now on to the ceremony!'
voicesThe fight for marriage equality isn't over yet, says Siobhan Fenton
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.

iJobs Job Widget
iJobs Money & Business

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...

SThree: Graduate Recruitment Consultant

£20000 - £25000 per annum + OTE £35000: SThree: SThree are a global FTSE 250 b...

Day In a Page

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
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'