Going for gold

The peak in the price of gold this week has reopened the debate around the suitability of gold within an investment portfolio.

With the eurozone debt crisis continuing to rumble along and the risk of a technical default in the US, the price of gold has been pushed over £1,000 an ounce for the first time in history.

The price of gold closed down 0.9% yesterday afternoon, at $1,586 an ounce. With prices this high, investors will always fear a bubble and worry about the risk of buying an asset at such a high price.

Reading the comments from a number of managers of commodities funds suggests they think even higher valuations of gold can be supported.

Catherine Raw, who is co-manager of the BlackRock World Mining Trust plc commented:

“The current fundamentals in the gold market are supportive of higher prices. Investment demand has been the most important driver of the bull market to date and the key factors that have been driving investment demand – concerns about financial markets, Eurozone debt and inflation – are likely to persist for the foreseeable future. The potential for further net purchases by central banks could also be supportive of prices.”

Francis Johnstone and Trevor Steel, managers of Baker Steel Resources Trust, share a similar view:

“The short, medium and long-term arguments for the gold price are very much still intact, particularly for gold mining companies, which have some way to catch up to reflect the current gold price let alone a rising metal price.

Within the portfolios we recommend to our clients, we rarely recommend gold as a specific stand-alone asset class.

If an investor already holds equities within their portfolio, there is a real danger of overexposure to gold and other commodities. A sizeable part of most indices in developed economies, including in the UK, represent the commodities sector.

Getting direct access to gold for investment purposes has always been a challenge, in terms of value and the mechanics of holding the asset class.

The price of gold remains an important indicator of investor confidence in other asset classes, but should probably not represent a prompt to rush head-first into an investment in this pricey asset.

Photo credit: Flickr/D’Arcy Norman