Take a look at gold now, while it is less shiny

2014-10-22 00:00

DURING 2010 and 2011, one of the most common questions I received from readers was “how do I invest in gold?”.

At the time, gold was trading at an all-time high, having had a bull run which saw the gold price rise from $1 000 per ounce to nearly $1 800 in just two years — a 125% return.

Then the run came to an end and since 2012, gold has been sliding downward, trading today at around $1 200.

The decline has been less dramatic in rand terms due to the weaker currency, but even rand-denominated gold returns have been flat over this period. Anyone who bought into the hype of three years ago would have been very disappointed in their return.

Not surprisingly, we have had no questions from readers about investing in gold recently, yet it is now, when gold is not shining, rather than after a strong bull run, that one should be investigating gold as a possible investment.

Scott Winship, portfolio manager at Investec Asset Management, wrote recently that it may be time to consider going back into gold.

Last year, globally investors were sellers off gold but this year has seen a change in sentiment and investors have slowed their sale of gold exchange-traded funds.

There are signs globally that inflation is picking up and gold has historically proven to be an excellent hedge against inflation.

Winship points to research by Goldman Sachs, which suggests a 91% correlation between the U.S. inflation rate and the U.S. dollar gold price over the past decade.

Historically, Geopolitical risk has also been positive for the gold price, as investors seek safe havens in times of political turmoil. Escalating tensions between Russia and Ukraine, as well as increased violence in the Middle East and the emergence of Isis (Islamic State of Iraq and the Levant) are all positive indications for gold. Winship says the tensions in the Middle East will also affect the oil price and over the long term, the gold price has traded at about 16 times the oil price. Winship says today that relationship is just shy of 12 times and arguably represents value for gold if oil remains at these levels.

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