Nuggets Of Wisdom

Money Marketing

Annie Shaw

Sceptics have been calling the top of the gold market for at least the last 18 months but despite a few downward blips, nothing seems to stop its upward trajectory.

Gold demand reached a 10-year peak in 2010, according to figures recently released by the World Gold Council. And since late January, when the unrest that started in Tunisia spilt over into Egypt before infecting Libya and Bahrain, the price of gold has risen almost 10 per cent.

But surely the gold price is a bubble that must soon burst? While many commentators think so, as many if not more believe the increase in the gold price is based on sound fundamentals as investors seek a safe haven against international unrest and rising inflation.

Fund managers and product providers are falling over themselves to accommodate the public’s desire to buy an interest in gold production or the precious metal itself. Possibilities range from mining shares, via exchange traded funds and commodity funds to physical bullion itself.

Last month, Standard Life became the first household name pension provider to allow investors to hold gold within a Sipp when it teamed up with GoldMoney, one of the world’s biggest providers and holders of physical bullion for retail investors.

While it has been possible to hold gold within a Sipp since the pension reforms of 2006, the process has generally been a relatively expensive one restricted to a handful of specialist providers. Standard Life has opened up the possibility of holding an investment in bullion within the mainstream retirement savings market by offering the opportunity to invest in gold bullion to its 100,000 Sipp clients.

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They will be able to buy or sell up to 2,000 grams of gold in one business day, with the spot price based on the trading prices from the London Bullion Market Association’s marker market. Standard Life head of pensions accumulation Alistair Hardie explains the rationale. He says: “We were responding to demand from customers to come up with a way of investing in gold that was easily accessible to them and their advisers.

“Anyone wanting to invest in gold within their Sipp simply contacts us and we arrange for an account to be set up for them with GoldMoney.

After setting up the security on the account, they have complete online access and can see price movements and buy and sell online. The adviser can have access to the account too. They are in complete control.”

Standard Life has agreed preferential fees with GoldMoney for both the purchase and storage of the gold. Purchase fees depend on the size of the transaction and range from 1.92 per cent for small purchases to 1.04 per cent for purchases of more than £600,000. Storage fees are charged at 0.15 per cent a year.

The bullion dealer Physical Gold is probably the main player in the market for Sipp-based gold investment. It has links with more than a dozen Sipp providers and trustees, including Pointon York, Mont-pelier, @Sipp, Investacc, Hornbuckle Mitchell, IPS, Greyfriars, Alltrust, Guardian and London & Colonial.

Physical Gold chief executive Daniel Fisher says the advantage of investing in gold is that it is a “simple and honest product”.

While there are attractive tax breaks associated with the holding of gold, such as exemption from VAT and capital gains tax, dealing, storage and insurance costs can cut into potential profits. It can also be illiquid. If you have shelled out something over £30,000 for a standard “good delivery” kilobar, you can hardly saw a corner off it if you need some ready cash.

Physical Gold gets round this by dealing in multiples of more manageable 1oz bars to enable easy partial encashment of a holding.

Standard Life’s gold investment vehicle is slightly different. While it is not a “paper gold” product, such as an exchange traded fund, and the investment is physically held in bullion, individuals own not their own gold bars but a share of the bullion within the vault meas-ured in grams.

In other words, although the gold exists in bars, each bar does not, as it were, have a customer’s name on it and it is not possible to inspect it.

Purist bullion investors might say that this hybrid scheme is not really investing in physical gold but for investors who simply want some exposure to the gold market, want to trade smaller amounts, trade frequently and have easy access to their investment, the facility provided by GoldMoney offers an ideal solution.

Fisher says that when you are thinking of investing in gold, as with any investment, you have to know why you are buying it, what the purpose of the investment is and what the risks of holding that particular investment are.

He says: “Ideally, physical gold should make up between five and 30 per cent of an investment portfolio and between 20 and 30 per cent in times of uncertainty.”

He adds, however: “Unlike many other investments, there are two main risks in holding gold – capital risk and currency risk. Like other investments, the price of gold could go down because of conditions in the market but UK retail purchasers of gold, which is priced in dollars, are exposed to the currency risk if sterling strengthens.”

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But is now the time to be investing in gold when prices are so high?

Clear Financial Advice director Howard Bullock warns: “Gold prices have been rising for some time now and although many fund managers are still bullish about this asset, one must not forget that what goes up generally goes down again at some point.”

Fisher is nevertheless phlegmatic. He says: “You can’t turn the clock back. Ideally, you would have bought gold two years ago before it rose 30 per cent but you have to look at the situation now. Why do you want to buy it? How are you going to sell it?

“If you look at the economic situation now, you can see unemployment at 2.5 million, the national debt is over a trillion, there are terror threats and uncertainty in the Middle East. At a time when other markets could go down an investment in gold provides portfolio insurance. It will still be there if the euro crumbles and stockmarkets fall.”

Evy Hambro, who manages the BlackRock world gold fund, which invests in mining shares rather than physical gold, agrees. He says that gold remains attractive because it remains scarce and difficult to extract and central banks are unlikely to switch their position of being net buyers in the foreseeable future.

Although central banks had been reducing their gold reserves for about 40 years, the policy has reversed over the past couple of years, with massive buying by banks such as the Indian State Bank.

Hambro believes, however, that investors interested in gold should have exposure to both ETFs and mining shares, with the dividends from the shares helping to offset gold price volatility.

But even if the forecast for gold demand remains good, what about profit-taking by existing investors or another unforeseen event? Since gold has risen so sharply, might an economic shock or a rush by investors to realise profits en masse cause a price crash?

This is what happened in January 1980 when the gold price hit an all-time high (adjusted for inflation) of $850 an ounce in response to the Soviet invasion of Afghanistan.

Shortly afterwards the price collapsed and it took 28 years to return to $850, in January 2002, badly lagging behind inflation. The all-time low price was Aug-ust 1999, when it fell to $251.70.

If the price of gold had even kept pace with consumer prices, it would stand at over $2,600, nearly double its current price. So, as a hedge against inflation, one of the main reasons people say they like gold, the metal has performed pretty badly. Could this happen again?

Barclays Capital precious metals analyst Suki Cooper believes that prices will hold up. She says: “Supply and demand are not behaving as though prices are about to ease. Key motives driving investment demand remain intact – from fears of currency debasement to spiralling inflation amid a backdrop of low interest rates.”

Daniel Fisher

Daniel Fisher formed physical Gold in 2008, after working in the financial industry for 20 years. He spent much of that time working within the new issue fixed income business at a top tier US bank. In this role, he traded a large book of fixed income securities, raised capital for some of the largest government, financial, and corporate institutions in the world and advised the leading global institutional investors. Daniel is CeFA registered and is a member of the Institute of Financial Planning.