Something solid in a world of upheaval

The price of gold has been soaring as investors run scared of stocks. Chiara Cavaglieri reports

Gold is more resistant to stock-market knocks, but it is not always the safe bet many believe it to be (TONY MCDONAGH / EPA)

With global markets in a state of panic and investors anxious to protect their money, many have again been dazzled by gold.

After heavy falls in share prices amid fears over eurozone debt and the US government's inability to keep its finances in order, the price of gold hit a record high of $1,780 per ounce.

"Gold has always been the leading safe haven for investors anxious to protect the value of their assets during times of political and economic upheaval," says Adrian Lowcock from independent financial adviser (IFA) Bestinvest.

Following Standard & Poor's downgrading of the US credit rating from AAA to AA+, investors dumped stocks, unconvinced that the global debt crisis was under control.

But while the precious metal has a reputation as something of a hedge against stocks and bonds, if it has already reached peak prices – or has even gone into "bubble" territory – is it too late, or dangerous, to seek a piece of the action?

"Gold offers a far more comfortable ride for investors seeking to protect their portfolios from global economic events. It is resilient to hard knocks. Indeed, it actually enjoys bad news. For the time being, it looks as if little will derail gold's fortunes and we expect it to continue to offer a good hedge against inflation and further economic upheavals," says Mr Lowcock.

Danny Cox from IFA Hargreaves Lansdown also plays down talk of a bubble, arguing that although short-term setbacks are inevitable at some stage, the price is still well below its inflation-adjusted high of about $2,400 an ounce in January 1980.

"While demand for gold is escalating, there is only so much of it to go around. Global production is now only marginally higher than in 2001, despite a 350 per cent increase in prices and the best efforts of the mining industry to find and produce more. Strong demand and constrained supply is a recipe for high prices," he says.

For those wanting to invest, there are three main options: exchange-traded funds (ETFs), mining stocks and the physical asset itself. Gold ETFs are passive investments and are available to buy and sell just like any other share. You can track the spot price of gold, or ETF Securities offers the ETFS Physical Gold fund which invests in gold bullion. These are easier to trade than a mutual fund and typically have lower costs. However, because they track the price of gold, they are a volatile option and, with the strong run gold has seen in the past few weeks, they may seem a little expensive.

Many experts say that now is the time to invest in equities instead, and point to the divide between the soaring price of physical gold and the slump in gold equities as a buyer's opportunity. Many gold mining stocks have tanked in recent weeks, with the likes of Centamin Egypt taking a nosedive after it announced that the impact of civil unrest in the Middle East earlier this year has meant it will produce less gold than expected.

"Centamin Egypt has been a popular stock with T D Waterhouse clients, coming fourth in our list of most traded stocks last week," says James Daly from stockbroker T D Waterhouse. "Although it has fallen from 160p to 100p in the past 12 months, over the longer term it has performed well, rising from a price of 25p five years ago."

If you don't want to trade an individual company's shares, funds such as BlackRock Gold & General and Investec's Global Gold fund focus heavily on gold and the larger miners. Others may offer more diversification; for example, the Investec Enhanced Natural Resources holds gold as well as other metals.

If you prefer to own hard assets, there is the online gold and silver bullion exchange BullionVault, or you can buy coins and bars over the counter at the ATM Bullion or Baird & Co London offices. There is even a new ATM for gold at Westfield shopping centre, the Gold to Go machine, selling gold at constantly updated prices and bars and coins in various sizes.

"A case can certainly be made for holding some physical gold, perhaps in the form of coins or ingots, at times of extreme market events such as those surrounding the collapse of Lehman Brothers," says Alan Smith from IFA Capital Asset Management.

Holding physical gold certainly offers protection when currencies lose value, but it is also much more difficult to offload. And there are storage fees and insurance costs to take into consideration. Be wary of investing in jewellery as a way to gain exposure to gold as retail prices are heavily marked up; moreover, it can be stolen or lost easily and the true value may rely too much on the design and craftsmanship than the gold content.

For keen gold investors, the advice is to keep exposure to a minimum, with most experts recommending a 10 per cent allocation. This should be enough to act as a natural hedge against other asset classes and currency debasement, without gold's own volatility being too much of a concern. For those who cannot afford any instability, the advice may well be to steer clear altogether in order to avoid the possibility of losing vast sums of money in a very short period of time.

"It is possible that we are now in a 'gold bubble' and those investing face the risk of losing far more on the downside than they could gain on the upside," says Patrick Connolly from IFA Chase de Vere. He points out that, after rising by an astounding 688 per cent from July 1976 to January 1980, the price of gold then fell by 65 per cent in two and a half years and took more than 28 years to climb back to that peak.

He adds: "Nobody knows for sure where the price of gold will go from here. But as most investors will already have indirect exposure to gold and other natural resources through broad-based equity funds, is it really sensible to take further risks by investing in what has proven to be a volatile and unreliable asset class?"