Investing

The precious metal is the investors’ favourite, a port in a storm, and there are plenty of clouds on the horizon. But should you be putting your money into this hot commodity? We examine both sides of the (gold) coin.

More upside

For

Gold may look to be historically expensive but, when you adjust prices for the effects of inflation, it is still some way from its real historic high of more than $US2000 an ounce in 1980.

Against

The 1970s was a period of high inflation in the US, peaking at 14 per cent at the start of the 1980s. The price of gold tripled from early 1979 to January 1980, before an almost as rapid reverse – not a great precedent.

Inflation protection

For

Gold is traditionally thought of as a hedge against inflation brought about by the devaluation of paper money. With the printing presses working overtime in the US, Europe and Japan, an alternative currency whose supply is limited and finite makes an appealing investment.

Against

Gold is a store of value but it’s non-productive. An investment – whether it be equities or bonds – generates income and can be valued on that basis. That means when you buy gold you’re punting on its price or using it as portfolio insurance.

A greenback hedge

For

Like other commodities, gold is priced in US dollars, making it a hedge against the greenback’s weakness. And the precious metal has an advantage over other commodities: it is less volatile. Temporary spikes in demand are met by increases in the supply of recycled metal.

Against

Yes, the gold price tends to rise when the US dollar weakens – but so does our currency. Its price in Aussie dollars has, in fits and spurts, managed only to move sideways at about $1400 an ounce since May 2010.

Diversification

For

The price of gold tends not to move in tandem with other assets – great for investors looking to increase portfolio diversification and reduce risk. The correlation coefficient of gold with other traded assets is so low as to be insignificant, World Gold Council research found.

Against

This may be true, but ask yourself this: when the price of gold loses its steam, will you still keep it in your portfolio? If the answer is “no” then, face it: you’re speculating not managing risk. Most gold investors now are more likely to be momentum traders.

Safe haven status

For

All of the above adds up to the near-mythical stature of gold as a safe port in a storm, which makes it an effective crisis hedge. Rising oil prices, natural disasters etc are all are factors that add to the allure of the reassuring permanence of gold.

Against

Unless you are a true bunker-building, canned food-stockpiling gold bug, buying an exposure to gold for this reason means you are betting on the psychology of the market. You need to ask yourself whether you are comfortable punting on the mood of other investors.

Emerging demand

For

Demand for gold from the fast-growing middle classes of China and India provides fundamental support for the price. There are well over 100 million Chinese and Indian households with annual incomes above $US10,000, and this number will more than double by 2015.

Against

Increasing access to more sophisticated financial products, and potentially a reasonable rate of return on Chinese bank deposits, could work to undermine the cultural proclivity for gold jewellery as a store of value in these, and other, emerging economies.

Si view: The gold story is largely one of sentiment, so investing in the stuff is a bet on the collective mood of global investors.

The catalysts for a reversal in the price of this precious metal would include the prospect of a resolution to European sovereign debt worries and stronger signs that the United States economy (and especially its housing sector) could survive without the benefit of massive government support.