KEY POINTS:
Michael O'Kane, bullion dealer at the New Zealand Mint
What is the current price of gold and what has driven its growth?
One ounce of gold will cost you about US$872 ($1101). After hitting a record high of US$1032 in mid-March, the price has come back because of an improved US dollar, a stronger US economy and profit-taking.
However, over the medium term, the precious metal has risen more than 300 per cent since 2000, and last year the price of gold increased 30 per cent.
This year we've already seen it appreciate a further 10 per cent. Gold is historically seen as a counter-inflationary investment, bought to offset the sting of higher commodity prices and weaker currency. Gold is also seen as a "safe-haven" investment. As demand for gold escalates during turbulent economic times, so does the price.
What is the current outlook for gold? How are the world's gold extraction rates faring?
Medium to long term, the expectation is for continued strong growth, with demand up and a declining supply. We are at the start of a "bull period" for commodities, especially metals, and these can run for up to 25 years.
The cost of petroleum products is increasing, so therefore the costs involved in mining metals and exporting them are also on the up. Last year, the amount of gold mined in South Africa, the world's largest producer, was 6 per cent less than 2006 extraction levels. Longer term, we'll see decreasing supply affect the price.
How does gold act as a hedge against inflation?
Many investment companies, governments, banks and individual investors use gold to "store" value at times of high inflation. Historically, the price of gold has risen as inflation has taken hold.
As a currency weakens, the value of gold in that currency tends to increase. In addition, commodity demands increase during inflationary periods - as does the cost to mine, refine and ship precious metals - resulting in an increase in the price of finished bullion products.
What percentage of a portfolio should investors place in gold? Why is it a "safe-haven" investment?
In a well-diversified portfolio, generally a 5 to 15 per cent stake in gold is recommended. The US and many Western European countries have a more developed investor sentiment for gold than New Zealand. In those countries we see higher percentages of people's portfolios are invested in gold.
Since it was first dug out of the ground, gold has held value. Now it is best viewed as an insurance policy for your portfolio. It protects against inflation and a weaker currency (currency hedging), and it is a liquid, globally accepted physical asset. Investors move to precious metals during times of uncertainty - be it geo-political, war or recession. It tends to give more protection than holding cash.
How is gold different from other investments? How are New Zealander taking advantage of the increase in the price?
Key factors that determine the price of a commodity, such as gold-mine output, for example, are different from factors that impact on the value of other investments, such as shares and bonds. Investing in commodities helps in diversifying the risk element in your portfolio.
We're not suggesting all commodities will automatically do better in inflationary times, but investors do find they hold up well against a sharply eroding currency value. Investing in a commodity takes care of the risk arising due to erosion in the value of the currency because most currencies are priced in US dollars.
With the higher New Zealand dollar, many Kiwi investors are buying gold as an exchange hedge. Buying while the New Zealand dollar/US dollar rate is high means you get more gold for the Kiwi dollar than you do in US dollars.
When the Kiwi dollar starts to depreciate against the US dollar, gold becomes more valuable in New Zealand dollars. At the New Zealand Mint we are seeing many more ordinary investors coming through the door looking to diversify their portfolio with the long-term and stable investment vehicle that is gold.
