Bullion gives investors the golden touch

Gold frenzies are great for journalists because they provide lots ofcolour, and I’m not just talking about bullion’s natural lustre.

 

Gold frenzies are great for journalists because they provide lots of colour, and I’m not just talking about bullion’s natural lustre.

 

In 1980, when gold was heading for US$850 an ounce, small investors panicked at the thought of rampant inflation following the second OPEC oil price shock. Like today’s flu shot seekers, they formed long lines to buy one-ounce gold wafers as a financial immunization against future uncertainty.

 

This time around, the fear is playing out differently. Investors small and large are buying gold, alright — they’ve driven its value up more than 30 per cent this year to slightly less than US$1,200 an ounce — but many are having trouble storing it.

 

In the U.S., HSBC Bank has told retail customers to take their coins and bullion elsewhere because it needs the vault room for institutional clients. This has occasioned a vast migration of armoured trucks as hoarders seek new hiding places that will be safer than their mattresses.

Gold may have limited practical uses, but it’s been a preferred refuge of value for close to six millennia. And these days, it has a lot going for it, starting with the worldwide uncertainty based on the faltering U.S. economy and dollar. Fears about the potential for inflation resulting from fiscal stimulus and government bailouts drive people to buy gold. Investment funds are reportedly heavily into the action.

The fact that central banks in places like India are adding to bullion reserves puts upward pressure on the price, so does news like the recent announcement that U.S. hedge fund manager John Paulson is launching a new gold fund. No wonder mines from Australia to South Africa are cranking up production.

But enthusiasts who aren’t hard-core gold bugs should remember that the price of this most precious of metals won’t always outperform other investments, chiefly stocks. Historically, these two asset classes seem to alternate as investor favourites, with stocks rising when gold is in relative decline and vice versa.

For verification, check the record of the Dow/Gold Ratio — the ratio of the Dow Jones Industrial Average index divided by the price of an ounce of gold. In the short and sometimes medium term, you might be better off investing in one rather than the other. Yet sensible investors will make a habit of diversifying, making gold or gold equivalents like mining shares part of a balanced portfolio that, over the course of a lifetime, will provide solid growth and sound slumber.

 
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