Don't let gold's glitter fool you into believing it's infallible

Experts warn that the precious metal's price will fall and is not a safe short-term bet for your cash. Emma Dunkley reports

If you think gold is one of the few places left to get decent returns, think again. Gold is often touted as a “safe-haven” and as one of the best ways to protect the value of your money against rising prices, but you could be in for a shock if you're betting the price of the precious metal will carry on rising.

Top fund managers such as Schroders Private Bank warn gold is expensive and a fall in its price could be around the corner. The strong performance of gold over the last 11 years, with it hitting all-time highs of $1900 an ounce in 2011, means it is now a very expensive way to invest your cash.

Robert Farago at Schroders says the price of gold recently hit a record when measured against UK inflation, based on history going back to 1560, making it look very costly in comparison with equities and as a form of protection against the rising prices of everyday goods.

Patrick Connolly of AWD Chase de Vere says he is “incredibly wary” of anything that has grown so much in value. “It is a mistake to think that any investment will keep going up indefinitely and when the price of gold does fall, it could be far and fast,” he says.

And buying gold in the view it will protect the value of your money as the price of everyday goods rises is flawed. In 1980, the price of gold fell by 65 per cent from its peak, in less than two and a half years. It then took more than 28 years to reach its 1980s peak price. If you had bought gold during this time, you would have just about clawed back your money.

But there is also a cost to holding gold, as purchasing coins and bars can entail dealing, storage and insurance costs, among others. “You've got the expense of keeping it in a bank as well as the opportunity cost, because you could have put money into a deposit account,” says Gary Reynolds of wealth manager Courtiers. “ So the cost is lost interest and security.” Indeed, gold does not produce any income, interest or dividends, it just sits where it is stored.

If you are happy to put an amount of money into gold without worrying about its performance over the next 10 years, then it could significantly grow in value, especially as there is only 170,000 tonnes in existence.

But, in the short-term, the price of gold can swing wildly. Mr Reynolds says the price of the precious metal hit around $1000 in the spring of 2008, but dropped after Lehman Brothers' demise to around $700. “If gold demand drops, it'll cane the price,” added Mr Reynolds.

Although the price of gold has been steadily rising over the past decade, this increase concerns some. “In this time, there has been an economic boom and a financial crash,” says Ben Seager-Scott of Bestinvest.

But gold cannot be an investment for all seasons, and should not be depended upon to protect in times of hardship, as well as deliver when the economy recovers. “As soon as interest rates go up, and you can get a real return on cash, gold will become a lot less attractive,” says Mr Seager-Scott.

Why people would want gold as an object in itself is also up for debate, as many people argue the precious metal does not have any inherent value, aside from its use in jewellery. Its value is based purely on supply and demand, so if investors retreat from gold, its price will plummet.

If you are concerned about where to put your money, industry experts say one of the best approaches it to ensure you spread your investments and do not just pick one safe haven.

“There is no individual asset class that will guarantee to protect your money in real terms and so the best approach is a diversified investment portfolio consisting of equities, fixed interest, commercial property and cash,” says Mr Connolly.

Aside from gold, there are other commodities which Mr Reynolds views as more effective for protecting against inflation. “Oil and food commodities are much better, because their prices are sensitive to a rise in inflation,” says Mr Reynolds. “If you put your money into oil, you're also not going to get any interest. But because it's highly correlated with inflation, it'll go up when inflation rises.”

If you do want gold, one of the most efficient ways of accessing it is through an exchange traded commodity, meaning you don't have to hold the gold bars yourself. ETFS Physical gold, for example, gives you the return of the price of gold, minus the fees. The product, which trades on an exchange like an equity, is backed by actual gold metal stored in a vault.

Emma Dunkley is a reporter at citywire.co.uk

Alternative safe havens

Cash is widely viewed a one of the only true “safe havens”, but with interest rates so low and inflation stillhigh, you are losing money in real terms, as it costs more to buy goods.

Government bonds of robust developed markets have long been considered a safe haven. So much money has flooded into UK government bonds that returns have dropped to record lows. Not only are investors not gaining much of a return, but with high levels of inflation, real returns are actually negative, making these investments unattractive over the longer-term. Patrick Connolly says the current “doom and gloom” won't last forever and when sentiment improves investors will be willing to take more risk and government bonds will seem less attractive. “When this happens, prices will fall and investors could face significant capital losses on investments they considered to be in a safe haven,” he adds.