A hot metal that can burn your fingers

Photo / Doug Sherring

Gold continues to have its centuries old allure, but both traders and sceptics agree - it's not for everyone.

Financial advisers stress buying gold is speculation rather than investment, one saying he wouldn't go near it. The metal was three years into its most recent rally when Lehman Brothers collapsed in 2008.

Gold loves market misery so after the financial meltdown and the European debt crisis, it was further boosted. However, it is tracking below inflation-adjusted 1980 highs.

But it is becoming more popular, with one Auckland trader reporting five times the daily inquiries and more than twice the number of clients taking the plunge than before the 2008 meltdown.

Bullion has strengthened by around 11 per cent this year and is set for the 10th straight annual advance, the longest winning streak since at least 1920.

Last month Goldman Sachs predicted the gold price would top US$1300 an ounce within six months. But unless you're an active trader, the advice is that you have to be patient and if you get the timing wrong, extremely patient.

The experts warn against getting gold fever and buying when the price is sharply rising - a time when amateur investors are most tempted.

Those who bought at the height of the 1980 boom had to wait a quarter of a century for the gold price to get back to those levels, and that's not allowing for inflation.

Although gold proponents decry January 1980 as a biased starting point, if you'd bought at $845 an ounce, allowing for inflation gold would have to hit $3627 to get your money back.

Financial adviser Martin Hawes reluctantly has a fraction of his personal investment in physical gold, but only to give him some cover for extreme financial calamity - the total collapse of paper currencies around the world.

"The big thing is that you can't invest in gold, you can only speculate in gold," he said, because an investment had to produce income so the return was not dependent on a change in price. With gold the only return you can get is a change of price be it up or down. People need to be very careful."

He said any first time investors hoping to make a quick buck should think hard about buying gold.

"In speculating in gold as an amateur you are up against a lot of professionals who do nothing but stare at screens all day and trade and speculate on very small price movements. It's like picking currencies - you're up against some very heavyweight professionals."

Funds such as the newly launched Liontamer Gold Index, which is linked to the price performance of raw gold, and buying shares in gold mining companies are other options.

Hawes said they can be volatile but mining companies in production produce cash flow and profits, especially when metal prices are high.

There are limited opportunities for NZX-listed companies. OceanaGold is the only company now in production listed here although exploration companies Heritage Gold and Glass Earth are also listed.

Peter McIntyre, an analyst with ABN Amro Craigs, said investors in gold mining companies needed to take into account gold reserves and how long the life of their mines was.

They needed to know whether companies were hedged or exposed to the spot price of gold. There has been a growing move by Australasian companies to unhedge themselves which McIntrye said made good sense when gold prices were climbing but when they fall the enormous cost of extracting and processing gold falls more sharply into focus.

Gold mining company stock prices are influenced by gold prices, new discoveries or reserves revisions. As an example of volatility OceanaGold's price has ranged between $1.03 and $4.85 in the past 12 months. It's now trading at $3.98.

Hawes said investing in Australian mining companies was relatively easy, but those investing further afield needed to beware of land rights issues at mine sites and political instability in those countries.

Adviser Jeff Matthews of Spicers agrees buying shares in mining companies is the best bet although he emphasises they are not for the faint hearted.

"They're like emerging markets funds. There are times when they shoot the lights out and times when they shoot you in the foot."

Otherwise, he warns gold bugs off buying physical gold.

"I just see it as speculative like cocoa beans or wheat futures.

"I've never recommended gold as an option - you [should] invest in something you know something about."

Financial turmoil had fuelled the most recent rally but when economic fundamentals improve this could change.

"Suddenly you get stability in financial markets - it's like musical chairs, suddenly you're left holding a whole bunch of gold. I say just don't go there."

Bullion traders take a different tack, but they too urge caution. New Zealand Gold Merchants director Tony Coleman said buyers needed to consider the value of the New Zealand dollar as well as the price of gold. The idea is to buy on a high kiwi dollar when gold prices are falling.

"I still think this market has a way to go. It's going to get volatile. It's not for everybody and so you buy on the dips."

NZ Mint bullion trader Mike O'Kane said before the September 2008 meltdown his company was getting three or four local and international inquiries a day.

It was now getting around 20, with half going on to buy gold or silver. The mint charges a commission of about 6 per cent on smaller amounts of gold. About 80 per cent of customers take it away, an ounce being the size of a 50c coin, a kilogram the size of an iPhone.

"It's definitely a long game - there's nothing in it until you sell. It's a bit like property - if you can get in and out of property quickly you're doing very well. It's timing more than anything."

He said typical small investors were putting something away for a rainy day or having it to take overseas, whereas a bullion trader in New York is looking for tiny movements on huge volumes.

He said anyone buying physical gold needed to be careful that it was certified, and if buying into an online trading account make sure they were able to get out of it.