View from City Road: Gold may glitter but it's still a risk

The word among the gold bugs yesterday was that the investment guru George Soros has not, after all, got out of the market. He retains some of his physical gold and his stake in Newmont Mining Corp, an investment that is highly geared to the gold price. However, there are good reasons for treading warily.

No one can know precisely what Mr Soros's interests are, or whether he was selling while letting it be known that he was an investor, all the better to ramp the price. Moreover, Mr Soros is quite capable of mistakes, as his record in the 1987 crash, the short-selling of the mark at the time of the European currency crisis, and his stake in the consortium that bought Imry Merchant Developers at the UK property market peak shows.

The gold market is also intrinsically volatile. Chinese demand fell back in the second quarter, and the full recessionary impact of the government's stabilisation policies has yet to be felt. Although global yields on alternative investments are falling, they are still higher than inflation - and gold is entirely yieldless.

The sudden sell-off from a high of dollars 408 an ounce was revealing, since it was due to fears that the Bank of France might sell its gold to rebuild its reserves of foreign currency. There is a real risk of a central bank sell-off. Worldwide, central banks and other official bodies hold 35,000 tons of gold, or nearly 70 years' worth of production. That is some overhang.