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The Lolly beginners' guide to investing in gold
Gold has been an amazing investment this century, beating the returns from shares, bonds and property. We look at why this is so.
by Gavin Lumsden on Jan 21, 2013 at 16:26
I visited the Albert Memorial, with its golden statue of Prince Albert, to talk about how demand for gold as a defence against inflation and as an alternative currency has been behind the soaring price of the precious metal.
This is the latest in The Lolly Investor Programme, a weekly series of videos explaining the basics of investment to beginners.
Hello, welcome to the Lolly Investment Programme beginners' guide to gold!
I've come to the Albert Memorial, which commemorates Prince Albert, husband of Queen Victoria who died in 1861.
This London landmark was made more striking by the decision in the 1990s to gild it in gold leaf.
I want to talk about gold because returns from the precious metal have easily beaten the returns from shares, bonds and property this century.
It’s a curious type of investment though, quite unlike those other asset classes, but plays an increasingly important part in investors' savings.
When I began this series a year ago I explained how income was a big driver of a lot of investment.
With interest rates stuck at an all-time low, investors' search for income has underlined the truth of an age-old rule.
This is that assets like shares, bonds and property are largely priced according to the income they yield, or are expected to produce.
Gold is the exception to that rule. There is no income to be had from a precious metal! Gold doesn't pay a dividend, interest or rent.
So what does it do?
The fact is gold doesn’t do a lot, but that’s its appeal.
Gold is widely used in electronics because of its conductive properties, but its main use has always been making jewellery and gold coins – and filling a few teeth!
And that’s because from ancient times until now gold has been associated with wealth.
But the bling factor isn't what excites investors.
Gold's investment significance lies in its impressive ability to store value.
Think about it. Treasures that were buried thousands of years are dug up and are worth even more today, in part because of the amazing craftsmanship and rarity of these artefacts, but partly because they are simply made of gold.
Investors love gold because its value is not eroded by inflation.
It’s also a tangible asset, which means if you own gold you can literally get your hands on it in a way that you can’t with stocks and shares.
That’s a big advantage if you’re worried about the stability of your bank or the financial system.
Property is also tangible, but who can put a house in their pocket in the way you can with gold coins?
The fact is gold is the ultimate defensive investment . When the brown stuff really hits the fan, and societies are crashing, never mind the stock markets, you want your wealth in gold.
As you can see from the chart the price of gold has soared in the 21st century, rising from under 300 dollars an ounce to nearly 1700 dollars today.
It really started to shoot up around the financial crisis in 2007 and 2008.
Although the banking system has stabilised, gold has continued to rise in response to the measures taken by central banks to prevent a depression.
Central banks like the US Federal Reserve and the Bank of England have effectively printed hundreds and billions of new dollars and pounds to reflate their economies after the bursting of the credit bubble.
Investors worry these ‘quantitative easing’ policies are hugely inflationary.
Many believe the Fed and the Bank of England are happy to let inflation rise to reduce the value of their countries’ massive debts.
Moreover, the US, UK and Japan seem to be engaged in a war to push down the value of their currencies. This is meant to help their exporters but it could also stoke inflation.
Gold’s appeal as a defence against inflation and as an alternative, purer currency has never been stronger.
So how do you buy gold?
Many professional portfolio managers put as much as 5% to 10% of their investors’ money in gold, so it’s an important consideration.
The easiest way for investors to get gold exposure is to buy an exchange traded fund tracking the gold price.
There are also actively managed funds which invest in gold and in gold mining companies.
However, with gold funds you own units or shares in the fund, not the gold itself.
If you actually want to own gold, there are specialist firms that will sell you gold coins and bars. This is the purest way of investing in gold, although the costs of storage are an issue to consider.
The big debate around gold is where it will go next?
Gold’s remarkable gains have slowed of late. It rose modestly last year as confidence returned to stock markets and the eurozone debt crisis subsided.
It’s possible gold will have a similar year in 2013 but after that could rise a lot more if inflation becomes a problem.
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