Have investors missed the boat with Gold?

Is it the right time to buy gold?

London, October 1  – While most retail investors now recognise the benefits of gold within their portfolio, many are now asking us at Physical Gold Ltd whether it is the right time to buy gold with the current price of around $1,000/oz.

To analyse this we need to look at two elements; the underlying gold price, and the GBP/USD exchange rate.

Firstly, with the $ spot gold price hovering around the $1,000/oz level, we’re pretty near the highest ever level of $1,023 achieved last year. Then, the magic $1,000 fixing was only achieved twice before the price fell away sharply. This year, there seems to be far greater support at this level, laying a good foundation to move onwards and upwards from here.

The fundamentals which support the gold price are still firmly in place. The world economy still has some time to run in its current cycle with record debt levels and unemployment, and increasing talk of the dollar’s status as the world’s reserve currency being threatened.

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Gold supply and demand

The supply/demand equation also continues to support the rise of the yellow metal.

Supply figures still remain limited, down for the 3^rd consecutive year, with predictions of further falls due to poor exploration investment. There was only 1 major new gold discovery in 2007 (defined as >2.0 million ounces), and none last year, which compares starkly with more than 15 a year being made a decade ago. This lack of new supply is exacerbated by the diminishing secondary supply due to more central banks hoarding and indeed building their gold reserves.

Demand on the other hand, was up 280% year on year for investment gold in the first quarter of this year, and continues to go from strength to strength in the current climate. With an increasing retail awareness of gold as an investment product with schemes such as Physical Gold’s SIPP partnership with Pointon York, we expect demand to remain robust. With limited supply and increasing demand, it could well be the right time to buy gold.

Even more poignant for a sustained gold run is the expectation once economies pull out of recession and into growth. Most literally, there will likely be an increase in industrial demand for gold, with its use in the electronics world. But it is the threat of inflation which will provide the most significant support for the gold price. With such a deep trough, and the associated size of the stimulus packages used to emerge from these, the ensuing growth  may succumb to inflationary pressures. While this would erode the value of paper currencies, gold provides a protection against inflation.

Our price target in $ over the next 6 months is $1,400/oz.

Sterling value

The other crucial element for UK investors to consider is the value of Sterling. While the $ price of gold may be testing new highs, the price in Sterling is not near its peak. Currently trading at around £620/oz, it hit a peak this year of £687/oz. This is due to Sterling strengthening earlier in the year on the back of optimists seeing ‘green shoots’.

However, the housing figures that stimulated this appreciation are now being overshadowed by the fundamental weakness of the UK economy and the Pound is starting to fall back, and consequently increase the price of gold in the UK. People are realising that the steady house prices are more indicative of a lack of housing supply than an economic recovery.

The fundamentals that Physical Gold believes will contribute to a weakening Pound are record unemployment, record borrowing, and a weakening Government under pressure.  There has even been talk of the Sovereign’s AAA rating being under threat, which would add further expense to our borrowings.  We feel all these factors will contribute to Sterling falling back further  against the Dollar.

Even more worrying, is the £200b of Quantitative Easing in the UK, already £50b over the original ceiling, with suggestions of another £25b injection to come.  Combined with record low interest rates, this provides the lethal cocktail for high inflation which will further fuel demand for UK gold to protect the value of savings.

We feel it is still the right time to buy gold for UK retail investors to provide balance to their portfolios.

Our price target for UK investors over the next 6 months is £900/oz.

Physical Gold Limited is one of the premier providers of physical gold and other precious metal assets in the UK. With headquarters at Tower 42, in the City of London, they can be reached on 020 7060 9992.

SOURCE: Physical Gold Limited