Scotsman article: Elemental charm of the asset that goes up when others tumble

06 June 2009

SINCE humans first learned to work metal, gold has held a mysterious fascination for mankind. Man's desire to possess gold has fuelled wars and conquests and levelled forests and mountains.

The world's finances have long been inextricably linked to gold. In 1717, as master of the Mint, Sir Isaac Newton standardised the price of gold, enabling currencies to be valued against this common commodity. Although the US became the last country to ditch the gold standard in 1971, the metal still plays a significant role in international finance. Most governments still keep reserves of gold. Gordon Brown rather imprudently sold off almost half of the UK's reserves (400 tons) between 1999 and 2002, when the price of gold was at a 20-year low. The price per ounce then was around $270 per ounce; it is currently £950, having breached the $1,000 mark in March last year.

Had you invested in gold seven years ago, you would now be sitting on a profit in excess of 250 per cent – which represents a compound annual return of almost 20 per cent a year.

Incredibly, (according to National Geographic) it is estimated that in all history, only 160,000 tones of gold have been mined – enough to fill two Olympic-sized swimming pools. Now that the world's natural gold deposits are being fast depleted, it's little wonder that its price has gone north so drastically in recent years. However, its price has been higher (in real terms) many times before. In inflation-adjusted terms, gold reached an all-time high of almost $2,000 per ounce in 1980 and it was worth more than its current level for much of the 18th century.

India has long been the world's largest consumer of gold and accounted for 20 per cent of the world market in 2007, double that of either of its closest rivals, China and US.

Increasingly however, gold is being bought by fund managers to asset-back their gold exchange traded funds (ETFs) or exchange traded commodities (ETCs).

Institutional and private investors alike can now gain exposure to gold in this way. ETFs have been around since the mid 1990's, but have only more recently grown in popularity, particularly in the US. ETFs are similar to index-tracking funds in that their price reflects movements in an underlying index, sector or commodity. However, ETFs are traded like shares and have lower costs than their unit-based cousins.

Because of its particular negative correlation with other types of investments, gold can be considered a distinct asset class in its own right, a safe haven in times of economic turbulence and a hedge against inflation. Comparing recent performance against other asset classes, gold was the clear winner in 2008, coming out on top for the third time since 2005.

Some limited exposure to gold may be appropriate for larger portfolios, and a sufficiently sophisticated financial planner will have access to one or more of the gold ETFs currently available. It should be remembered, however, that the price of gold can be extremely volatile and its future value is impossible to predict.

Paul Lothian is a director of Verus Chartered Financial Planners in Dundee.

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