Thursday, November 27, 2008

Is now the time for Gold...again?

As the world unravels is gold looking more attractive than ever? According to Citigroup it is.

The bank said the damage caused by the financial excesses of the last quarter century was forcing the world's authorities to take steps that had never been tried before.

This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

"They are throwing the kitchen sink at this," said Tom Fitzpatrick, the bank's chief technical strategist.

"The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.

"Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don't think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes," he said.

"This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised."

"What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We're already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore," he said.

Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. "If true, this is a very material change," he said.

Mr Fitzpatrick said Britain had made a mistake selling off half its gold at the bottom of the market between 1999 to 2002. "People have started to question the value of government debt," he said.

Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off its all-time peak of $1,030 in February but has held up much better than other commodities over the last few months – reverting to is historical role as a safe-haven store of value and a de facto currency.

Gold has tripled in value over the last seven years, vastly outperforming Wall Street and European bourses.

But how can you own gold in the most effective way?

1. Gold Bars
Bars come in metric sizes, and are based directly on that day's gold price, plus a premium for manufacture and marketing. The smaller the bar, the bigger the premium. According to ATS, a one-gram bar would cost £24 but has an immediate underlying resale value of only £16.20, giving a markup of 48pc to the retailer.

Not smart, in our opinion.

2. Sovereigns
One popular way to own gold is by buying gold coins, with 22-carat gold sovereigns the favourite with British investors. Sovereigns dating from about 1887 and up to 1982 are currently the best bet. Although their face value is only £1, they cost £136 to buy but have an immediate resale value of £118.

By contrast, modern coins dating from 2000 cost more, at around £160, yet their intrinsic value as an investment is the same £118. Coins from before the late Victorian period are even more desirable, but they have much greater rarity value and are therefore more expensive.

3. Krugerrands
Another popular option is to buy South African Krugerrands. The smallest is a 0.1oz coin, which might cost £70 and have a resale value of £50. A 1oz coin costs £567 at the time of writing and has a resale value of £512.

4. Exchange-traded funds
Gold ETFs are not technically funds because they follow a single security. ETF gold securities are traded on the London Stock Exchange. They essentially track the gold price and can be traded daily – all you pay is the dealing charge of around 0.4pc. They are also regulated financial products. Visit for more information.

Gold ETFs enjoyed a record quarterly inflow of 150 tonnes between July and September. The peak in inflows occurred in late September, triggered by the collapse of Lehman Brothers and a fear of further failures in the banking sector. Net inflows surged by an unprecedented 111 tonnes, equivalent to $7bn, during five consecutive trading days.

5. Unit trusts and investment trusts
These are few and far between, the most popular being BlackRock Merrill Lynch Gold & General, which invests in the shares of gold mining companies as well as other commodity businesses. Advisers reckon general commodity funds could also do the job for private investors as they dabble in gold-related stocks – JPM Natural Resources and ACDS Australia Natural Resources remain popular. Gold mining equities tend to be more volatile than the gold price.

6. Gold accounts
Gold bullion banks offer two types of gold account – allocated and unallocated. An allocated account is effectively like keeping gold in a safety deposit box and is the most secure form of investment in physical gold. The gold is stored in a vault owned and managed by a recognised bullion dealer or depository.

With an unallocated account, on the other hand, investors do not have specific bars allotted to them. Traditionally, one advantage of unallocated accounts has been the absence of storage or insurance charges, because the bank reserves the right to lease the gold out.

Check out HF Markets for more information

7. Gold shares
You can of course buy individual shares of companies that either trade or mine gold. Evy Hambro, who co-runs the BlackRock Gold & General fund, recently said the discount between the price of gold and that of gold shares was the greatest he had known. Meanwhile, Mark Harris of New Star said gold shares continued to look cheap and remained a decent portfolio diversifier.

London-listed shares include Highland Gold, the London-listed miner partly owned by the Russian billionaire Roman Abramovich, and Peter Hambro Mining, whose share price recently halved.

8. Jewellery
While thousands of items of gold jewellery will change hands this Christmas, they are not considered serious investments. Jewellery accounts for more than 60pc of total demand for gold, which was estimated at around 3,547 tonnes in 2007.

India devours 800 tonnes of bullion, more than 30pc of annual global gold mine production, mostly as jewellery. But although over the long term these jewels should hold their value and rise in line with inflation, manufacturing costs and the jewellers' markup mean they would sell for a fraction of the purchase price for the first few years of ownership.

9. Gold certificates
Historically, gold certificates were issued by the US Treasury from the Civil War until 1933. Denominated in dollars, the certificates were used as part of the gold standard and could be exchanged for an equal value of gold.

Nowadays, gold certificates offer investors a method of holding gold without taking physical delivery. Issued by individual banks, particularly in countries such as Germany and Switzerland, they confirm an individual's ownership while the bank holds the metal on the client's behalf.

10. Structured products
A number of structured products linked to commodities have been launched. They are either baskets of commodities or individual commodities such as sugar, oil, platinum or gold.

Structured products are typically five-year plans that aim to pay you a set return and limit your downside risk. For example, Quantum Asset Management's Protected Gold Portfolio offers a minimum capital return of 100pc at maturity plus 100pc participation in the rise of the underlying assets over the investment period, subject to an overall maximum capital return of 165pc.

Friday, November 07, 2008

Can Obama Re-Ignite Our Love Of All Things US?

Barack Obama being elected President was a defining moment in history. I have always had a love-hate relationship with politics and this has been mostly hate in the US simply because, in my lifetime, most of the Presidents have been largely uninspiring and, in some cases, down right useless.

My politics are naturally conservative, being a child of Thatcher, so I should not have any positive feelings for Obama being President. However, it seems to me that this man is something different, not a left winger with an agenda like Blair and Brown in the UK, but a reformer, someone who can make positive changes and I am not the only one.

The images of people having election parties around the world, Kenyans partying through the streets waving US flags and German's commenting that they 'want to love America again', is just astonishing.

The fact that he happens to be black is just a side issue. Yes it's marvellous that a black guy can get elected in the US and yes it marks a huge step forward for all races in America, and that can only be a good thing, but that is not the story.

The story is the man himself and that is what people are reacting to, it is also a story of people starved of leadership looking for someone to take control.

I am sure most people in the world have become weary with George Bush. In our leaders we aspire to have an educated, strong, reliable and honest person running the show. This gives us reassurance that we are being looked after by someone we can trust.

Bush was non of these and few people believe anything he said.

It is odd that some American friends have said that in many ways Americans around the world are judged by what their President is like, and over the last few years that has not been a nice thing. I read in The Daily Mail yesterday that this was echoed by a chap called Chris Johnson in Chicago.

"Now I can travel overseas again and people won't look at me all funny when I tell them which country I come from, you don't know how much that means".

Many important people have made comments on the Obama effect but the above statement, for me, sums up what it is all about. Barrack Obama is seen as a man who can 'fix' America and make Americans proud.

Fundemantally we all love our American cousins, we love the movies, the TV shows and even their over the top waiter service. We find them at times brash, over-cofident, selfish even, but we love them non-the-less.

As Brits we have covetted our 'special relationship' with the US but in recent years with Bush at the helm and a succession of idiots in charge of the UK we have become disillusioned, bitter even, about our out-of-touch politicians, we crave a leader who will make a difference.

He may not be ours and his politics maybe not be my cup of tea, but I for one am glad that he won.

Churchill once said, a little tongue in cheek, "You can always count on Americans to do the right thing - after they've tried everything else.”

Obama may turn out to be a great President, he may turn out to be all noise and speeches, but America stood up on November 5th and made the right choice.

November 5th in the UK is 'Bonfire Night', we let off fireworks, build huge fires and burn effigies of a man named Guy Fawkes who, 403 years ago, tried to blow up the Houses of Parliament.

While we were burning the memories of traitor who was trying to wreck our political system, America was choosing a hero who is looking to fix theirs, I hope he lives up to his promises for his sake, for our sake, but most of all for our US cousins who have a taken a flyer but, in my opinion, reached into their hearts and made the right decision.

God Bless America.