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Demand for bullion at fever pitch

Gold-dispensing vending machines? Laws to make it legal tender? John Collett looks at the rise and rise of bullion.

Gold-dispensing vending machines? Laws to make it legal tender? John Collett looks at the rise and rise of bullion.

The gold price is hitting record nominal price highs of more than $US1600 ($1450) an ounce, up from about $US300 10 years ago. And most analysts are forecasting the price will rise even higher, and challenge the all-time high of 1980, when it reached $US2400 in today's dollars.

Gold could easily reach $US2000 this year or next as investors in the US, the euro zone and Britain worry about their governments' ability to manage huge sovereign debts and expect their currencies to face more downward pressure, says the editor of Sound Money Sound Investments, Greg Canavan.

"Gold is in a long-term bull market and it will not end until there is mass participation, where you have a lot of retail investors trying to get involved," Canavan says.

Gold has been the favoured safe haven throughout history. It has also long been recognised as a good store of value and a hedge against inflation.

The state of Utah in the US recently passed a law that allows its residents to use gold (and silver) as recognised legal tender alongside the Greenback because it is so worried about the collapse in value of the US dollar against most other currencies over the past two years.

Gold rush

The chief investment officer at fund manager Select Asset Management, Dominic McCormick, has had gold exposures in the funds he runs since the early 2000s. Select's funds have an exposure of between 5 per cent and 10 per cent to gold.

"We think we are closer to the end of the bull market in gold than to the beginning," McCormick says. "At some point, you are going to see excessive enthusiasm for gold."

There is always the risk that there is too much speculation, he adds.

The yellow metal is rapidly becoming more accessible to small investors, with two securities listed on the Australian sharemarket whose prices reflect the gold price (see box).

And German company Ex Oriente Lux has installed "Gold to go" vending machines in the United Arab Emirates, Germany, Italy, Spain and the US. Britain's first recently opened at the Westfield shopping centre in London.

The machines dispense coins and bars of different weights. The prices are updated every 10 minutes and a 1 gram pure-gold bar costs about $60. But whether those buying the gold are doing so for investment purposes or simply to have a memento of their travels or to buy friends a gift is an open question.

The chief economist at AMP Capital Investors, Shane Oliver, says gold is a hedge against a "blow-up" in financial markets, a loss of confidence in major currencies and inflation but it is speculative by its nature.

Gold does not provide any income. That means there is no softening of the impact of falls in its price. Gold is a "growth" asset and should not be used as a substitute for government bonds or cash, which tend to have more stable returns, he says.

Also, all the gold produced is still in existence and can come back on to the market at any time, Oliver says. "You are going to be relying on other people paying more for it than you did," he says. "It is not like copper, which has industrial uses and can be analysed in terms of supply and demand.

"From 1980 to about 2000, gold performed terribly and then from 2000 onwards, it has been in a massive bull market, along with other commodities."

Risk

Anyone thinking of investing in gold would have to weigh the currency factor.

Since the start of 2009, the gold price in Australian dollars has not increased by nearly as much as the US dollar price. That's because of the rise in the value of the Australian dollar against the US dollar over that time. Currency is a double-edged sword and if the Australian dollar were to fall in value against the US dollar, that would add to the returns from gold.

Some gold-related investments, such as managed funds that invest in gold miners (and usually also in gold futures and gold bullion), sometimes remove the exchange-rate risk from the funds' returns. That way, at least the return the investors receive is the return from the actual investments, with the changes in exchange rates removed.

Managed funds tend to have high minimum investment amounts of $20,000 or $25,000 and their management fees tend to be high because they are promising to produce returns that are better than the market.

Access to physical gold has always been difficult for small investors. They can buy gold from the Perth Mint, which, for a fee, will also store the gold on behalf of investors.

Canavan says anyone buying from the mint should make sure the gold is not held in an "unallocated" account but in an "allocated" account, where ownership of the gold is attributed to the investor.

British company BullionVault provides another way to own physical gold. Canavan has used BullionVault for his personal investing. BullionVault allows the investor to choose to have the gold stored in Zurich, London or New York.

Australia is home to some very good gold miners. The standout is Newcrest Mining, which is one of the biggest gold producers in the world. With its headquarters in Melbourne, Newcrest is among the top-20 companies listed on the Australian Stock Exchange by market capitalisation.

Holding shares in a gold miner is a claim on the profits of the company and not the gold itself, Canavan says. The performance of gold-mining shares is also reflective of the performance of the broader sharemarket.

Exchange traded funds - the offerings

For investors wanting to get direct access to gold, the easiest way is through the two exchange-traded funds (ETFs) on the Australian sharemarket. Both are backed by gold bullion held by custodians in segregated accounts in London vaults. Both hold legal title over the bullion.

The BetaShares gold bullion ETF (ticker code QAU) tracks the US dollar gold price, less management and custody fees of 0.59 per cent a year.

An ETF is structured as a trust with unit holders rather than as a company with shareholders. Units of the BetaShares ETF are bought on the Australian sharemarket through a broker and trade just like a share. Its currency exposure is hedged back to Australian dollars, removing the currency exchange-rate risk from the gold bullion returns.

BetaShares ETF has been designed to appeal to self-managed superannuation funds, financial planners for their clients, institutional investors and high-net-worth investors, says the head of investment strategy at BetaShares, Drew Corbett.

"BetaShares maintains full legal charge over the bullion and is independently audited," he says.

The other "ETF", Gold Bullion Securities (ticker code GOLD), is technically not an ETF.

Director of sales, Asia Pacific at ETF Securities, Nigel Phelan, says it is an "exchange-traded commodity" and is structured that way because many fund managers are restricted by how much they can invest in other funds.

The GOLD security is not hedged for exchange-rate risk and the security tracks 10 per cent of the Australian dollar price of gold, minus fees of 0.4 per cent a year.

Of the two options, investors are in effect paying 0.19 percentage points a year more for the BetaShares ETF to protect against exchange-rate risk.


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