A rather balanced account...

From the U.K. Telegraph no less!

http://www.portal.telegraph.co.uk/money/main.jhtml?grid=M3&menuId=-1&menuItemId=-1&xml=/money/2001/10/21/ccluke21.xml

Gold beckons the nervous

(Filed: 21/10/2001)

THESE are certainly interesting times in investment markets and all sorts of bizarre assets are suddenly being taken seriously by the clever money managers.

The classic "barbarous relic" is gold, perhaps the original store of wealth. While it returned an annual average of almost 20 per cent from 1968 to 1979 - ahead of virtually every other form of real or paper asset - it has savagely underperformed shares and property since then. But every dog has its day . . .

Gold has always been seen as a safe haven in dangerous circumstances. Many Americans believe the Four Horsemen of The Apocalypse are about to ride into Manhattan, and are feeling scared and financially battered. They are retreating to hard commodities such as gold that they see as offering security.

They have suffered a $4,000bn reduction in the value of their portfolios; many are experiencing a bear market for the first time. They are frightened that there will be a full depression. The present psychology of buying gold is about preservation of capital, hedging and playing the contrary game.

One of its great disadvantages is that it generates no income. But in the current low interest rate climate, the yield on cash, bonds and the like is almost negative once inflation is taken into account. So by buying gold now you are missing very little on the dividend front.

It is all about the capital gain - or loss. At least gold is highly liquid, with minimal commission charges, unlike most other alternative asset classes like property and venture capital.

Moreover, experts purport that gold is negatively correlated with other assets - it rises when they fall, and visa versa. If you buy this argument, then the current decline in stock prices is a major gold-buying signal.

There are various ways to play the gold market. One can simply buy hallmarked gold bars at about $280 an ounce, or bullion coins such as Krugerrands at a small premium, or gold futures or options.

It is important to check the custodial arrangements for the physical metal and the credibility of the financial institution that helps you; instead of them storing it you can always take delivery - but you had better get insurance! You can even invest in numismatic coins, but these sell for a substantial premium to the value of their gold content.

Alternatively you can invest in gold mining shares. Gold mining equities offer greater leverage than holding the metal directly, but also added forms of risk. These types of shares can be highly volatile and difficult to value on fundamentals.

They are mostly quoted on the Australian, South African, Canadian and American stock exchanges. Do take care and remember that dubious promoters, speculators and charlatans often manipulate small mining stocks.

The world's quoted gold mining shares have a total market capitalisation of $30bn-plus, so there is plenty to choose from. If you want a conservative investment, pick a solid multinational like Anglo American, Barrick Gold or Newmont Mining.

The price of gold is determined by a host of factors - mostly macroeconomic. Central banks hold about a quarter of the world's gold and carry out selling and lending activities - often fairly secretly.

Annual world production is about 2,350 tonnes, while consumption varies, but is about 75 per cent for jewellery, and the rest for the electronics industry and dentistry. Consumption easily outstrips supply. Yet simple supply and demand from users and producers is only one element of the metal's overall price dynamics.

In the early 1980s, the era of high inflation, gold peaked at $850 an ounce - in the past 20 years it has fallen to a third of that level, partly thanks to improvements in technology cutting the cost of new production. This woeful investment performance encourages the diehard gold bugs to believe that gold is incredibly cheap and due for revaluation.

They feel the panic over war and recession will increase investment demand. The gold bulls say gold rises when the dollar falls - and many commentators believe the dollar to be overvalued.

They like the shelter and stability gold offers, and its retained purchasing value. They cite the example of how an ounce of gold would buy a suit today - just as it did in Henry VII's day.

The extremists insist gold is going to $1,700 an ounce. I remain to be convinced. You can get more details of their wild hopes on www.amergold.com and www.gold-eagle.com. The more sober case for gold is made on www.gold.org.

But then the gold bulls are all the subject of Virgil's comment on the subject: "What do you not drive human hearts into, cursed craving for gold!"

Luke Johnson is chairman of Belgo Group.

-- Anonymous, October 21, 2001