Diana Clement: Gold starts to regain its sheen

Gold has an allure like few other investments but, during the 1980s and 1990s, the metal lost its sheen.

The spot gold price fell from US$850 ($1287) an ounce in January 1980 to less than US$300 an ounce in 2001. During the past year, the price has risen from just under US$440 to nearly US$555. But is gold a good investment now?

One factor in its favour is that throughout history gold has kept pace with inflation. The Old Testament says an ounce of gold in King Nebuchadnezzar's reign would buy 350 loaves. This week, an ounce of gold would buy you about 350 loaves of bread - depending on your choice of loaf.

Gold has held its own during economically difficult periods. From 1929 to 1939, during the Depression, gold rose 70 per cent while sharemarkets collapsed.

What's more, investors typically turn to gold when the political and economic outlook is uncertain. It could be argued that we are living in such times.

Just how high gold can go is anyone's guess. Crédit Agricole Cheuvreux London-based investment analyst Paul Mylchreest is predicting a mid-cycle price of US$900/oz and the possibility of a spike to US$2000 or higher over the present cycle.

For this year, bullish predictions include those of TheBullionDesk.com analyst Ross Norman, with an average prediction of US$618/oz. But before you start having your gold fillings extracted, some analysts are predicting an average price as low as US$479.

Clients of Robert Oddy, of International Financial Planners, will be laughing now. Oddy started moving a portion of clients' diversified portfolios into gold last year when it was US$435.

Oddy is still bullish on the outlook for gold but cautions mum and dad investors against putting all their metal in one basket. "Investing in gold shouldn't be considered as an easy way to wealth, but more of a portfolio diversification benefit as a hedge against potential inflation, volatile currency and reduction in the value of the US dollar [and] lower equity prices."

Likewise, John Commins, general manager of investment advice at Equity Investment Advisers and Sharebrokers, says the gold cycle is far longer than most private investors can stomach. Gold hit its last high in 1980 and has yet to reach that height again in real terms, let alone nominal ones.

"A lot of people jump on the bandwagon thinking this is a new era," says Commins. "You could also make the argument that governments holding vast amounts of gold in treasuries may decide this is a good time to sell it."

However, he notes the kiwi dollar is historically high and buying gold - which is priced in US dollars - is one means of diversifying currency risk.

Commins recommends Purse Mint Gold warrants on the ASX as one of the most efficient ways to get an exposure to gold without physically holding the stuff.

Other opportunities close to home include buying mining stocks such as Oceana Gold, Aurora Minerals or Heritage Gold NZ. However, Commins believes such stocks have been bid up and are "probably looking expensive".

By far the simplest way to get into gold investing is to buy lumps of the stuff and store it under the bed - but make sure you're insured. A small number of dealers, such as AGR Matthey and Morris Watson, will sell physical gold bullion.

On Tuesday of this week, AGR Matthey was selling 1oz ingots for $871.50 - which was a little over the spot gold price of US$555 ($828.25). Gold bullion is free of GST. If you bought the same ingot in December - when I suggested them as a Christmas present with lasting value - you would have paid $650.09.

You can also buy leveraged gold - borrow money to buy gold which is stored for you - from Commonwealth Precious Metals. However, some people will have memories of investors who lost money in Goldcorp - a company that didn't have enough gold in its vault when the crunch came.

Whatever you do, you should read a lot more than one article on the subject of investing in gold before taking the plunge.

A good place to start your quest for knowledge is the World Gold Council's website although as an industry body the council has a bias towards gold. Or, says Commins, read Peter Berstein's The Power of Gold : The History of an Obsession.