Meltdown's slowing can be a danger . . . but there's always inflation
Clark Berger gets almost misty-eyed as he reviews his first foray into the bullion market last August, after he had lost confidence in the banking system.
"I love gold," said the 48-year-old flamenco guitarist outside a cafe near his West Hampstead home, recalling a series of decisions that led him to invest thousands buying gold through an online platform.
"It's beautiful, isn't it?"
A former antiques dealer, Berger was at the fore of what has emerged as a sizeable herd of private investors worldwide buying gold in various forms. In eight months, he estimates, his original £39,400 pound ($70,500) investment has risen to more than £52,500 pounds -- a return of nearly 35 per cent.
"If I'd put it in the stock market, I could have lost the lot. If I'd put it in a bank, it could have gone bankrupt. If I'd stuck it under my mattress, I could have been robbed and had nothing left," he said.
But with gold prices having already surged so far, financial professionals aren't sure continued gains are feasible.
Spot gold prices jumped 14 per cent in the week after Lehman Brothers filed for bankruptcy protection last September, and tumbling stocks and fears over the stability of the financial sector fuelled a sharp run to an 11-month peak above $1,000 an ounce in February.
Gold is currently trading just above $900 an ounce -- well below its recent highs, but still historically strong.
"You have to be a bit careful with gold, because the price is pretty high," said Jason Walker, senior manager with financial advisory firm AWD Chase de Vere.
Worries about bank stability and volatility in other assets have driven more small investors into gold but its popularity is also due to the simplicity with which bullion can now be bought and sold, he said.
People can buy coins and bars in person, over the phone, online through sites such as BullionVault.com which Berger used, or through the post from companies like ATS Bullion, Baird & Co and Gold & Silver Investments.
Professional investors have switched to gold in the form of futures, bullion bars, and, increasingly, bullion-backed exchange-traded funds.
Walker says that while clients' interest in gold jumped as the financial downturn bit, headlines suggesting the downturn may be slowing make heavy investment in bullion at this stage more risky, especially as other assets, from equities to property, are relatively cheap.
But if gold may be threatened by revived appetites for nominally "riskier" assets like stocks and shares, support may come from another source -- inflation.
Analysts say fears are rising that the quantitative easing measures from authorities around the world, as well as record-low interest rates in countries including the U.S., could cause a spike in inflation if a recovery gets underway.
Gold has historically been judged a good hedge against rising inflation, as it tends to hold its value when paper money is devalued.
"If expectations that the economy is beginning to recover take root, we may see a shift in the forces driving gold trading away from safe-haven buying and towards inflationary expectations," said James Steel, a precious metals analyst at HSBC, in a note to clients.
Only when central banks turn hawkish would gold bears carry the day, in his view: "Gold prices are unlikely to substantially retreat until investors are assured that the Federal Reserve and other central banks will be able and willing to combat inflation, should it increase, once a recovery takes hold."
Dealers in coins and bars say demand is holding firm, although it has eased since the peak of the credit crisis.
Besides physical gold, products such as exchange traded funds (ETFs) offer exposure to the gold price without having to store the stuff. The Web site Berger used stores his gold and allows him to trade it online.
Gold ETFs issue securities which are traded on a stock exchange, backed by physical bullion that is held by an independent custodian.
In theory, if the ETF issuer were to fail, the buyer can still redeem the gold from the custodian.
London-based ETF Securities operates three gold-backed ETFs, the largest of which, Gold Bullion Securities, has holdings of around 4.3 million ounces as of mid-May, according to its Web site.
A small but significant chunk of its investors are from the retail side.
"A much wider range of investors are getting involved with gold," said Nicholas Brooks, ETF Securities' head of research.
