Gold still a safety net for savers

GOLD may have lost its glister as investors seriously consider flogging their holdings now the price of the so-called investment safe haven has gone into freefall.

The price of the yellow metal has tumbled to a five-year low of $1,088 per ounce – down 40pc from its high of $1,900.

Back in 2009 bullish investors in the precious metal chattered excitedly about whether it would break the $2,000 barrier.

They mourned Gordon Brown’s decision when he was chancellor to sell the country’s reserves at a pitiful $275, and wondered just how far the metal could go.

Gold has traditionally been seen as a safe, physical store of value. It becomes particularly popular in times of uncertainty.

But when people start feeling more optimistic again, interest in the precious metal dims.

The major trigger which sent the value of gold soaring was when central banks around the world dropped their base rate of interest to record lows.

Now, as the world starts to emerge from a global recession, the reversal of this move is turning investors away.

Gold may be valuable, but it doesn’t pay an income. Owning a bar of gold means nothing until you sell it.

When interest rates are rock bottom this is not a problem. But if savers are once more able to earn money on their cash deposits, then gold becomes a less attractive option.

The US is widely expected to increase its interest rates this year, perhaps as early as September. This could start a domino effect of other governments following suit, which could see savers flee from their gold investments.

Some already are – last Sunday night some $1.3bn of gold was sold on the US commodities exchange in just four minutes.

As well as looming rate rises, investors have been spooked after the Chinese Central Bank released details of its gold purchases, which were lower than expected.

Furthermore, while a surge in demand was predicted as the question over a Greek exit from the euro still lingered, this never materialised. Uncertainty in the eurozone was largely expected to prompt investors to buy up safe assets such as gold, and sell out of risky equities and bonds, but strong-stomached savers stayed the course.

With the outlook so gloomy, some may wonder whether such a trough in the gold price represents a buying opportunity. Experts are saying not.

John Ventre, head of multi-asset funds at Old Mutual, says: ‘The problem with gold is its price isn’t measured against anything else, so it depends entirely on sentiment. And sentiment has shifted.’

Because of that, it’s been a painful time for anyone investing in a gold fund. Some are down more than 50pc over the past year.

Angelos Damaskos runs the Junior Gold fund, which is down 45pc over 12 months. With a remit to invest in gold and commodity firms, all he can do is try to limit the downside to his investors’ cash. He says: ‘We are focusing on businesses who are cost effective, with good capitalisation. Firms need to be able to mine gold for less than $1,000 an ounce or they are losing money.’

He likes Canadian miner Lake Shore Gold, which has made rapid progress reducing costs and improving efficiency, and West African business Endeavour Mining.

Damaskos says: ‘We have sold out of riskier holdings and focused on stronger firms with high quality mines and sustainable costs. And we hope that the price remains at the current level, we really don’t want to see it dip below $1,000.’ Being dictated by sentiment, it would only take a change in out- look for investors to flock back to the yellow metal and push the price back up though.

Markets could react badly to a rate rise, uncertainty in the eurozone is far from over and even ongoing terror threats could cause a change in the wind.

Adrian Lowcock, head of investing at Axa Wealth, says: ‘Trying to predict the price of gold is a difficult game.

‘In times of distress it is in great demand and for this reason it will continue to appeal to savers who are concerned about the strength of the economic recovery.’ HolyBlackisareporterwith

MoneyMail