Private investors are wooed to mercurial gold: Experts tell Neasa MacErlean why the precious metal is not a safe bet

GOLD has once again worked its wicked magic on private investors. A week ago the metal reached its highest price for 30 months, weighing in at over dollars 400 per ounce - only to drop to dollars 374.50 yesterday. Such is the essentially mercurial nature of gold.

Until then, gold had sustained a spectacular run over four months.

This fed through to the price of gold shares and all seven top-performing unit trusts in the Micropal listings for the month of July were gold funds. Mercury's Gold & General led the Micropal performance tables over a year. The Mercury fund has produced a profit of more than 200 per cent over the past 12 months.

Mercury views this week's price fall as a temporary setback and expects the price to start rising again shortly. Increased demand from China, hopes that central governments are putting aside plans to sell gold and low interest rates - and therefore a low cost for holding gold - are cited as the main reasons.

However, reports that the Bank of China has just sold six tonnes of gold in London demonstrate yet again the waywardness of this market and the inability even of the experts to make safe predictions.

Ian Henderson, manager of Save & Prosper's gold fund, says: 'I would recommend the fund to investors who are aware of what's happening to the price of gold, who follow events internationally and who are prepared to both buy and sell. It's not a fund to buy and hold.'

Only five months ago, in March, the gold price hit dollars 326 - its lowest for seven years. One of the causes of the recent upturn has been the commitment to the market of two of the world's best-known financiers. Sir James Goldsmith has recently begun moving from gold mining into physical gold. George Soros, meanwhile, has moved into gold mines.

Both these men are natural gold investors. They enjoy speculation, they can play long-term, they can afford to lose and they have only put a small percentage of their wealth into gold. But even the gold fund managers and gold brokers warn most other investors to stay away. 'As an investment I'd say forget it,' says one precious metals dealer. 'Put your money in the building society. With gold what you expect to happen doesn't happen.'

This week's bout of selling comes at a bad time for the World Gold Council, which has just launched a campaign - sponsored by seven of the large mints - to encourage private investment, although the campaign will be far more low-key in Britain than in Germany and the US. The problem is VAT. Private investors buying bullion or coins have to pay 17.5 per cent VAT. Jewel and coin specialists Spink & Son advise customers to buy antique coins more than 100 years old as a way of minimising the VAT bill. Under an agreement with Customs & Excise, only the dealer's profit is chargeable to VAT on antique coins - not the full value of the coin. But even when the gold price was soaring more people were selling coins than buying them. Most of the individuals approaching Gold Investments in the Baltic Exchange have been people who bought gold at its dollars 800 peak in the early 1980s and who have been facing massive losses since then. They are still so desperate to get out that they are prepared to sell for half that price over a decade later.

Gold coins can be ordered through the banks or specialist dealers. Half- sovereigns can be ordered through NatWest branches for pounds 49.35 including VAT but excluding postage. A full sovereign from NatWest costs pounds 78.73. Spinks charges pounds 67.11, including VAT, for an antique sovereign.

Hatton Garden and the City are not the only locations where there has been a buzz in the air about gold. The large Asian jewellery shops of Southall, Wembley and Birmingham have traditionally sold most of their gold in the wedding season from May to September. Although demand has declined in the past few years, Hirja Lakha Jewellers of Wembley remembers occasions when families spent pounds 30,000 on gold. They, too, have seen the price rise along with demand over the past few months.

Most Asian jewellery is 22-carat - pure enough in content to be regarded as an investment by gold experts. Even the jewellery specialists are wary of the gold trade. 'It's a strange metal,' says Nigel Tooley of Spinks. 'It's just a question of sentiment.'

The European Guide to Gold Investment, free on receipt of a postcard to European Guide Offer, The World Gold Council, Kings House, 8-10 Haymarket, London SW1Y 4BP.

(Photograph omitted)