The price of gold was on the rise today after Germany’s decision to repatriate its bullion. We explain how you can profit.
Demand for gold bullion has risen during the financial turmoil of recent years Photo: Alamy
Gold enthusiasts were today bouyed today by the decision of Germany’s central bank to pull its gold reserves out of Paris and New York.
It follows warnings from the country’s Court of Auditors that bullion held abroad had "never been verified physically" and was not under proper control.
The Bundesbank is to recall its reserves as leverage against future currency fluctuations, resulting in pulling a chunk of its holdings from New York and all its bullion from Paris.
The price of gold per ounce rose $14.50 to $1,682.60 by mid-morning today.
Demand soared during the financial crisis as investors first sought gold as a safehaven and then because it can be a hedge against inflation. The price rose more than threefold between 2007 and late 2011 - from around $600 to a peak of $1,895.
"Gold bugs" say the world is moving towards a de facto gold standard again as China, Russia and other reserve powers boost their holdings to diversify out of dollars and euros.
But gold's rise was more modest in 2012, up by 8pc in 2012 but gold-related equities did not fare so well. Some investors fear gold assets, such as gold mining companies, may be seized in less stable countries.
Investors in the £1.6bn JPM Natural Resources fund, which largely invests in gold miners, lost 13pc of their money over last year and other gold, mining and commodities funds also suffered: Investec Global Gold fell by more than 10pc and BlackRock Gold & General is down 13.6pc over the past 12 months.
The Carmignac Commodities fund also suffered from its exposure to gold stocks, but the managers are optimistic about the outlook.
“We believe global monetary growth will benefit gold over the long term. This is why gold stocks still account for nearly 16pc of Carmignac Commodities,” said Didier Saint-Georges of Carmignac. “We introduced Argonaut Gold, a Canadian gold company with a healthy balance sheet and strong earnings.”
Wealth manager Brian Dunnehy of FundExpert.co.uk this week urged investors to sell gold buillion and buy gold mining shares.
“As central banks crank up the printing presses, gold is neither a safe haven or an inflation hedge,' he said. "But central bank largesse could trigger a significant bounce in gold mining shares."
“Before Christmas, when the US Federal Bank announced continuing massive money printing, gold should have soared - it didn't. But that same central bank largesse can trigger a significant bounce in the shares of gold mining companies in 2013. The large deflationary waves, from demographics and huge debt piles that governments refuse to tackle could keep a lid on the gold bullion price for sometime.”
But not everyone is pessimistic about the forecast for bullion. In October BlackRock fund manager Evy Hambro, predicted that the third wave of quantitative easing could result in the gold price hitting US$2,400/oz by the middle of next summer, and the Central Bank in South Korea has doubled its bullion assets over the past year, purchasing 16 tonnes in July alone.
Aside from gold funds, if you are looking to add the precious commodity to your portfolio, we outline your options below.
Bars come in metric sizes, and are based directly on that day's gold price, plus a premium for manufacture and marketing. The smaller the bar, the bigger the premium.
Twenty-two carat gold sovereigns the favourite of British investors. Sovereigns dating from about 1887 and up to 1982 are currently considered the best investment. Bullion coins recognised as UK legal tender are exempt from capital gains tax.
Another coin option is to buy South African Krugerrands. The smallest is a 0.1oz coin, which costs about £125 at the time of writing.
The specialist website Money Week has a directory of bar and coin dealers.
ETFs are funds, traded on a stock exchange like shares, that allow investors to track the performance of particular indices or a commodity, providing the investor with the same returns as this underlying market.
ETFs are available for gold, silver, platinum and palladium. ETFs can be traded daily – all you pay is the dealing charge of around 0.4pc, or £7 per trade.
ETFs are increasingly the most popular method of gold investment. Research by Source, a provider of exchange traded products, shows that inflows into European gold ETPs reached $6.8bn in 2012, constituting staggering 15.4pc growth.
Gold bullion banks offer two types of gold account – allocated and unallocated. An allocated account is effectively like keeping gold in a safety deposit box and is the most secure form of investment in physical gold. The gold is stored in a vault owned and managed by a recognised bullion dealer or depository.
With an unallocated account, on the other hand, investors do not have specific bars allotted to them. Traditionally, one advantage of unallocated accounts has been the absence of storage or insurance charges, because the bank reserves the right to lease the gold out.
You can of course buy individual shares of companies that either trade or mine gold.
Historically, gold certificates were issued by the US Treasury from the Civil War until 1933. Denominated in dollars, the certificates were used as part of the gold standard and could be exchanged for an equal value of gold.
Nowadays, gold certificates offer investors a method of holding gold without taking physical delivery. Issued by individual banks, particularly in countries such as Germany and Switzerland, they confirm an individual's ownership while the bank holds the metal on the client's behalf.
The investor avoids storage and personal security problems, and gains liquidity by being able to sell portions of the holding by simply telephoning the custodian.
The Perth Mint also runs a certificate programme that is guaranteed by the government of Western Australia and is distributed in a number of countries.
While thousands of items of gold jewellery change hands every year, they are not considered serious investments.
India devours 800 tonnes of bullion, more than 30pc of annual global gold mine production, mostly as jewellery. But although over the long term these jewels should hold their value and rise in line with inflation, manufacturing costs and the jewellers' markup mean they would sell for a fraction of the purchase price for the first few years of ownership.
What is the gold standard?
Britain effectively moved to a gold standard in 1717 when the government linked the currency to gold at a fixed rate. All major countries, other than China, switched to the gold standard in the late 19th Century, linking their own currencies to gold.
Britain later dumped the standard during the First World War only to return to it in the 1920s.
The gold standard was further strengthened by the 1944 Bretton Woods Agreement, which created the International Monetary Fund and an international monetary system linking national currencies to the U.S. dollar that was convertible into gold.
The gold standard abandoned in 1971 by President Richard Nixon. The era of fiat money began at that point, allowing currencies to fluctuate based on confidence and more influenced by domestic monetary policy.
By Emma Wall16 Jan 2013