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A golden investment opportunity

By Nicholas Watts

Last week, when talking about alternative investments, I mentioned gold.

So I thought that this week a closer look at ‘that which glisters’ might be interesting.

When Lehman Brothers collapsed back in September it seemed that the world’s financial systems were on the verge of complete meltdown.

But, simultaneously, the gold rush was well and truly picking up — gaining 22% by mid-October.

In one way the reason for this seems very obvious, gold being the only apparent safe haven for investor’s money whilst the banks were looking precarious.

This aside, gold has always, in hard times, represented a solid, reliable, permanent asset.

Such is the scramble for gold coins and bullion at the moment that dealers have widened the spread between the spot price and their premiums.

To give an example, at the end of October South Africa’s Fidelitrade, one of the largest gold coin dealers, quoted the Krugerrand one ounce gold coin at a $75 premium to the spot price.

Despite this however, the general market has seen a slide of late with gold coming off its high of $700 and over the last four weeks in particular it has lost a fifth of its value.

There are a couple of possible reasons for this — the falling price of oil and the rising dollar. For UK invest ors you could also add the falling pound.

Gold has always, in hard times, represented a solid, reliable asset

However recent interest rate cuts have produced something of a rally.

All well and good you may say, but what about the prospects for the ‘yellow stuff’ going forward?

Although I would not claim to be any sort of commodities expert, several factors would indicate that gold may still be a good investment providing good returns for the future.

The first is that, despite the Government’s attempts to convince us that UK plc is much better off than elsewhere, we are undoubtedly in a recession.

Secondly, the production of gold is under pressure, the drop being as much as 20% to 30% with some reduction in quality as well.

The Rand Refinery, which is the world’s largest single refining and smelting complex for precious metals, actually ran out of gold stock in August this year.

The combination of these two factors should therefore help push the price of gold back up.

Many fund managers feel that the returns on gold, in particular, will improve as the recession deepens. Indeed, some feel that the price may go up as far as $1,600.

In the context of other commodities, much has been written about how the global slowdown has resulted in demand from places like China and other developing economies having fallen rapidly.

This, together with western economic slowdown, has meant that values have fallen too, despite some investors doing well in the early part of the year.

But investing — as opposed to tactical day trading — is intended to have a longer time span.

So, on the principle that you should consider buying when prices are low, “now” would seem favourable because many commodity funds, which invest in gold, are very reasonably priced.

Where can you buy gold? As I indicated earlier, you can simply get your hands on some gold coins and put them in a safe place.

Or you can buy gold bullion — although this really needs to be stored in secure, commercial premises.

You can also buy gold equities — either direct or in the form of a unit trust.

It rather depends on whether you want pure gold or gold along with a mixture of other metals. Either way, don’t jump in without doing your own, exhaustive research.

Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services which is regulated by the Financial Services Authority. To contact him, use the website

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