Why has gold got problems?

Gold has been revered by mankind for its value and allure since 3,000BC when it was discovered.  

However, today gold is (relatively) out of favour among investors. It has often been thus, it was unpopular for 20 years in the 1980s and 90s, slumping to a low of $360 an ounce In 2001.

It travelled upward, reaching a new high in 2012 at $1,834. It has been on a downward mode since, slipping back $1,241 at the end of June.

What is the appeal of a lump of yellow?

Gold has always been regarded as a safe haven when there is geopolitical uncertainty.

Gold is appreciated as protection against inflation and currency gyrations. Gold is a valuable tool for hedge fund managers and speculators because of it is, at times, volatile.

As in the girl covered in gold in the James Bond film – the yellow metal is  appealingly simple. It’s relative rarity, its non-corrosive, malleable qualities are understood by everyone.

It is a heavy metal but can also be hammered out thin, or stretched into fine wire. Gold alloy is used in computers, electronics, medicine and dentistry.

It appeals because it can be handled daily via jewellery - a wedding ring, a gold chain - unlike many other financial assets.  

China and India like it

China is the largest gold producer in the world at 355,000 kilograms a year. Whatever the production of gold, or movement of gold prices, it is likely to stay popular in the Indian subcontinent.

The Indians love gold and imported 521 tonnes of it in the first six months of 2017, compared to just 510 tonnes for all of 2016. They turn it into jewellery, coins and bullion. For them it represents a celebration of their culture, something to rely on when other investments fail.

Everyone likes gold. Source Shutterstock

So why is gold lack lustre?

Interest in gold revolves around uncertainty. Fear of the future drives gold prices up, for example, when there is a threat of war. After the UK EU referendum in 2016, the gold price rose – for a bit. It also rose when Trump won the US presidential election in November.

The current North Korean testing of nuclear missiles/US issue is supporting gold. The gold price has looked like a line of mountains for all of this year, but losing momentum.

Commentators say that the primary driver of a bearish gold price at the moment is rising global yields.  Naeem Aslam, chef marekt analyst at US Think Markets commented in early July after strong US job figures: "The data has brough negative news for gold traders as there isn't anything in this [jobs] number whichis gong to put the brakes on an interest rate hike."

Interest rates have been very low since the financial crisis of 2008/2009. After many a false dawn, the feeling is that rates will rise. Hence the gold price continues  to be under pressure.

Gold has continued to be constrained since early July when the European Central Bank, the Bank of England, and the Bank of Canada all hinted that they were considering a tighter monetary policy.US Treasury bill yields and the German Bund yields are trending up,  putting more pressure gold.

Investing in gold

The gold price, like in any market, goes up and down daily, year in year out. The smart money makes money from these fluctuations and hopes to make more money from bigger fluctuations.

Some people say that an investor shouldn't regard gold as an investment, but more of an insurance policy, hedge or even a bed for the bad times when other markets are in bear mode.

However,  others say it makes sense for investors to have a limited exposure to gold as part of a diversified portfolio. May be just buying a selection of 18-24 carat gold jewellery, like the Indians, or a good gold watch or three, would do it

^{Gold mining. Source Shutterstock.}

Storing gold simply

The physical gold bullion market was not user-friendly to private investors for 20 years from 1980. Then the gold price strengthened early this century, and physical gold trading became easier.

This was thanks to the internet bullion exchange BullionVault which in 2005 started offering storage in vaults in a specific location for investors. So ownership of  physical gold bars or ingots became more straightforward.

Currently there are 66,000 people worldwide using BV.

Gold exchange traded funds (ETFs) appeared about 2003, targeted at financial institutions. These invest in gold producing companies, gold bullion and/or track gold indices.

Gold ETFs

A gold ETF is a quoted debt security backed by gold assets. A fund tracks the price of gold indices or store physical gold. ETFs are traded on major stock exchanges including New York, London, Mumbai, Paris and Zurich.

For example, SPDR Gold Shares (GLD) is an ETF that buys bullion. PowerShares(DGL) buys future contracts and tracks the DBIQ Optimum Yield Gold Index Excess Return index.

Gold funds

Investors find gold funds useful. See Blackrock’s Gold and General Fund ($1.2bn) which invests for the long term in gold mining and precious metal commodities, as does Investec’s Global Gold fund (£81m).

Speculators and investors (retail or wholesale) like gold-related funds and ETFs because they can work in a bit of exposure to gold in their portfolios without having to take delivery of the metal.

Conclusion

A gold enthusiast might comment that a less robust gold price over time provides a buying opportunity, indeed there is always a buying opportunity for those who wait. Traders wait for an uptick in volatility, then whether the gold price is  dragged down by rising interest rates or not, they may still be blessed with the Midas touch.