Investors rush for gold amid glittering prices worldwide

Bullion dealer Clare Goldsworthy reports strong demand. Picture / Richard Robinson

The global gold rush, which has pushed prices to 18-year highs this week, has local investors piling in, dealers say.

Gold prices spiked past US$500 ($710) an ounce this week - largely driven by fears about the weak US dollar.

New Zealand Mint general manager Mark Sutton said the strong prices - nearly double what they were five years ago - were creating unprecedented demand.

He said the company - New Zealand's only minter of gold bullion coins - had a record production year.

Clare Goldsworthy, of Auckland bullion dealer AGR Matthey, also reported strong demand.

She said sales to small investors were usually about the $5000 to $10,000 mark but people were increasingly buying larger amounts.

One individual recently bought $500,000 worth of gold.

But Whakatane-based investment adviser Brent Sheather - who writes a column in the Business Herald - said gold should be viewed as another form of currency.

He said fears about the burgeoning United States deficit and weakness of the greenback were prompting big investment funds to seek other more stable alternatives - pushing up the price.

Gold was traditionally a popular investment in times of crisis.

The metal was sometimes described as "the anti-dollar" because it tended to perform when the major international currencies were out of favour.

It was seen as a hedge against inflation and was traditionally popular during unsettled times - so fears about terrorism and bird flu might be having an impact.

Sheather said that, just as he would not advise small investors to gamble on the currency market, he did not recommend gold as a direct investment.

If people really wanted to invest in gold, they should look at managed funds that included some goldmining stocks.

The goldmining companies tended to do well during periods of strong demand and by using managed funds investors could limit their risk to any one sector.

Sheather said direct investment in the metal had some major downsides.

"Gold doesn't return dividends and, unless you want to stick it under your pillow, there are costs involved in storing it."

The price might have nearly doubled in the last five years but the 10-year average return on gold was still just 2.2 per cent, compared with the New Zealand sharemarket's return of 10.4 per cent.

AGR Matthey's Perth-based chief executive, Brian Bath, said there were two kinds of demand for gold: "physical" (for use in jewellery and industry) and investment.

Investment demand was driving the present price rise but that demand was also the most fickle.

In normal circumstances, supply and demand were well balanced between the mining industry and the physical users of gold.

The three sources of gold supply were: mining, recycling and hoarding (particularly in government reserves). Bath said the world's central banks were believed to be holding the equivalent of 10 years' worth of mining.

Good physical demand during the last five years had been underpinned by the increasingly wealthy Chinese and Indian markets.

But when there was excessive investment demand, the physical buyers tended to sit back and wait for the price to settle.

Bath said that was starting to happen now.

If gold supply is increased without a sustainable underlying physical demand, then the price could become vulnerable to big falls.

But some are picking the gold rush has a long way to go yet.

Last weekend, Pierre Lassonde, president of mining giant Newmont, said he thought this was just the start of a long boom that could see gold prices hit US$1000.


THE DRILL FOR INVESTORS

The price

The price has gone above US$500 an ounce for the first time since 1987.

It has almost doubled in price since 1999 when it hit a low of US$252 an ounce.

Gold recorded a high of US$850 an ounce in 1980.

Weakness in the US dollar has driven investment demand for gold in the past few months.

Practical demand (jewellery and industry) is also driven by increased wealth in India and China.

Buying gold

Dealers such as NZ Mint sell physical gold in coins and bars. The bars are bigger and more popular with large-scale investors.

Buyers can store the gold themselves or let the dealer store it for a small fee - about 2 per cent of its value annually.

Investing in gold-mining stocks is another option as shares in those companies tend to rise with the gold price.