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Investing in gold - all that glisters...

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The current market turmoil has left many investors wondering where on earth to put their cash for safety. If the country's fifth largest mortgage lender can wobble and have to be bailed out, no wonder people get nervous. One beneficiary of the volatile climate is gold - this age-old and oft-forgotten asset is fast appreciating. The price has risen steadily over the last few months, reaching a recent 27-year high of $737 an ounce. As a private investor how do you get in on the Midas act? Or is it too late for budding Goldfingers?

Sandra Conway, managing director of bullion dealers ATS Bullion, says her company has been "very,very busy" over the last month with turnover rising 50%. She says people are pulling money out of bank accounts and selling shares because the Northern Rock experience has shaken confidence and people want something like gold in case of emergency. Transactions for private investors are ranging from £20,000 up to £100,000 while some people are spending as much as £200,000 on acquiring the yellow metal. Many customers are first-timers who are prepared to take physical delivery of coins and bars and either store it themselves or arrange safe custody elsewhere.

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Krugerrands, kilo bars and gold sovereigns are top of the list for Conway's clients. Sovereigns, which are exempt from capital gains tax, (any coin which is sterling is exempt), can be bought for £95 each while a 5 gram bar is currently priced at £68.

It is worth noting that under current rules gold bought for investment purposes (generally in the form of bars and coins) is free from VAT.

If you haven't got a big enough vault at home (!) another way to enter the market is with an "allocated gold account". It means physical gold is set aside and stored in a vault managed by a recognized bullion dealer or depository.

Courtesy of World Gold Council

The investor is the owner and must meet the costs of insurance and storage - a bit like keeping gold in a safety deposit box. The bullion dealer or depository is not allowed to trade, lease or lend the bars except on instructions of the account holder.

There are also cheaper "unallocated gold accounts". These operate more like bank accounts. You don't get specific gold bars but you are entitled to the asset value. Investors rely on the solvency of the bank or dealer in the same way as they would with any other kind of account. It costs less but it isnt so secure.

Exchange-traded funds offer a relatively new way of gaining exposure to the gold price without the hassles of storing the commodity. These securities are traded on the stock exchange and are backed by physical gold held mostly in allocated form. They are also called "exchange traded gold".

Investors may also get some exposure to gold with equities of gold mining companies or through collective investments such as OEICs, mutual funds and the like. Some invest in gold mining, others may be broader-based. Obviously, there are different factors at play here and the performance of such shares will depend on the costs of mining, likelihood of gold discoveries, and so on.

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Is gold still on the up?

Tony Baird, managing director of bullion merchants, Baird and Co., certainly thinks so. He believes that the price is nowhere near enough its ceiling and might touch $850 before Christmas. He says, "People want a physical asset," rather than a promise to pay which is implicit in paper money. "People are afraid of becoming a creditor of a bank."

Sandra Conway echoes this, "A lot of people are buying at the moment and are paying very large amounts... so people think it is going up... There are very few sellers at the moment."

Other positive vibes come from Evy Hambro, manager of the MLIIF World Gold & Mining fund at investment management firm, BlackRock. Looking at the gold price well into next year, he says, "Dollar weakness plus a large chunk of uncertainty in the financial markets have helped to push gold towards the top of its trading range. With production from the world's gold mines declining and emerging markets' demand for jewellery strengthening, we expect that market fundamentals will remain favourable for the balance of this year and into 2008."

So gold could be a handy addition to a portfolio especially in these times of uncertainty. It is a hedge against inflation and against fluctuations in the US dollar and, moreover, the stuff is virtually indestructible. However, as always, it's sensible to talk to your independent financial adviser, especially if considering a sizeable investment. Decide what you want to achieve and be mindful of the opportunities for resale. Getting into the gold market is one thing but getting out should neither be hazardous nor costly.

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01 October 2007 © Moneyextra.com

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