Gold still a bold investment?
By Meera Patel | 12 Aug, 2008
Over the last five years we have seen the gold price surge from around $350 an ounce to a peak of over $1000 in March this year. Since then the gold price has been unusually volatile. The price fell sharply following its peak only to recover much of the ground again by mid-July to a price of $988 per ounce. In the last few weeks however it has fallen once more to currently $870 (athough I suspect this will have changed when you read this).A rather confusing picture I have to say, many reasons have been put forward. For one, a general fall in jewellery demand this year as prices have been too high. The fall in the oil prices and strength in the dollar in recent weeks has also been a contributing factor to the fall in the gold price, as has government intervention to ease the credit squeeze problems. Exchange traded funds which have kept demand levels high have also begun to cut their exposure which has contributed to the fall in the price.
That said, we need to focus on fundamentals. Uncertainty is still very much prevalent in the global economy and whenever the credit problems have re-emerged this has led to a rally in gold prices. This is because gold is seen as a relatively defensive asset in a wider portfolio.
Furthermore, supply has been restricted in recent years. Gold mine production peaked in 2001 and has since been fairly flat. Reserves are being depleted and production levels are expected to fall in the years to come.
Interestingly, the more recent fall in price has showed a renewed demand for jewellery, especially from India and Turkey although this has been in the very short term. If this continues this should be supportive of the gold price particularly as India is the biggest market for jewellery demand.
If you believe in the long term drivers for gold, funds like the BlackRock Gold & General can offer investors exposure to the long term growth prospects of the asset. The JPM Natural Resources Fund, while being a broader based commodities fund, currently has a large exposure to gold and could also be a consideration. Please note these are higher risk funds but they can offer good diversification in an overall portfolio provided investors take a long term view.
