Gold is grabbing the headlines - here's how to get in

Gold is flirting with $1,000 and the dollar is in freefall, which means more and more people are likely to jump on the precious metals bandwagon. So what's the best-value way to buy in?

There is chaos in the jewellery markets. The price of wedding rings is changing so fast that that there is no way you can pop into a shop in Hatton Garden, London, for a quote on a Friday and expect the price to stand on a Monday.

Jewellers have been reporting a rush from clients wanting to sell old necklaces and bracelets, and banks are pouring out press releases reminding people to make sure all their favourite things are properly covered. The average British household holds around £1,785 worth of jewellery, says Abbey, but 14% of us have absolutely no insurance for it at all.

So what's with the sudden sense of panic? It is all about precious metals. Having paused for breath briefly last month, the silver, platinum and gold prices have been soaring again: gold is up 15% this year and is now trading at $990 (£495) an ounce.

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Gold: the ultimate safe haven

Gold is the ultimate safe haven investment, and there is nothing investors need more right now than a safe haven. Recession in the US is all but certain (Warren Buffett thinks there is already one) with house prices still falling at speed, and data out last week showing the biggest one-month fall in construction spending since the early 1990s (it has been one of the biggest drivers of US growth in the last few years).

At the same time the credit crunch appears to be steadily getting worse rather than better, with securitisation markets barely functioning, and estimates of the total cost of the sub-prime crisis moving towards an extraordinary $1 trillion.

Then there is inflation. In the UK the price of goods leaving factories saw their highest price rise for at least nine years (when the records began) in February. The BDO Inflation Index, which collates the price expectations of business managers, has also hit a new high.

Many managers - and this is the worrying bit for consumers - say that they intend to pass price rises on to us rather than take a hit to their profits. The fact that agricultural commodity prices are still rising at rates that even the biggest bulls (me included) could never have forecast doesn't exactly help either. Nor does the fact that basic wages in China are increasing and are expected to rise by up to 21% this year, which will push up the prices of low-end manufactured goods here.

So what next? I suspect that the gold price is going to go an awful lot higher. Until now it has been a niche investment. I've been writing about investing in gold here for a good four years, but still the money going into the precious metal has come more from a few governments (Russia increased its holdings by 44 tonnes last year alone, and now holds 438 tonnes in total), dedicated "goldbugs" and the big hedge funds and institutional investors.

Yet now the dollar really is in freefall and the gold price is grabbing the front pages by flirting with $1,000 an ounce. It seems likely that some of the Asian governments which hold billions of dollars but little gold might now look to change this balance. Ordinary investors might now also jump on the bandwagon in droves, partly out of fear and partly because little else is rising (anyone else noticed that the FTSE 100 is trading slightly below where it was 10 years ago?)

There is not much supply around to meet all this new demand - the miners are still struggling to get production up and the recent power problems in South Africa are hampering their efforts to do so: you can't send workers a couple of miles down into deep mines if you can't be sure of your power supply. The gold supply is rising at 2%-3% a year at best.

Given how fast it has been moving, the gold price is going to be volatile from here, but that doesn't mean you shouldn't hold it and it certainly doesn't mean that you should be trading in and out of it (far too hard!). Instead, just have it and hold it: the long-term trend for gold is, I think, up relative to all currencies. Note that gold's last inflation-adjusted high was near $2,000.

How do you get in? You can hold physical gold (just pop down to Hatton Garden and buy some) although I'm told that a lot of dealers are running out of the kind of little ingots and coins small investors like to buy. Otherwise there are London-listed gold exchange-traded funds or there is the Merrill Lynch Gold and General Fund which I have held for years and am resting all my dreams of a happy retirement on.

Right now it might also make sense to hold a few individual miners for the simple reason that their share prices have not gone up along with the gold price, despite the fact that this is more than covering their rising costs (of equipment, staff and power). This isn't a situation that is likely to last - usually in a gold bull market, gold stock prices rise faster than the price of physical gold and I'd expect that to start happening soon this time round too.

Among the majors, Barrick Gold (NYSE:ABX), one of the world's biggest producers, looks like the best bet right now. It doesn't have the political or power problems of the South African mines, given that it mainly operates in Australia and the US. Despite rising costs, its earnings still rose 28% in the fourth quarter of last year.

An ex-geologist hedge fund manager friend, fresh from a big mining conference in Toronto, offers one more tip, AIM-listed explorer Leyshon Resources (LRL). Leyshon operates in China (now the world's largest producer of gold) where it expects to start production early next year. It is well managed and it looks cheap - like those of many other miners its shares have barely budged in the last year.

Finally, if you are looking to buy a wedding ring but are finding prices a bit much, consider palladium. To the untrained eye it looks just like platinum (as, if we are honest, do silver and white gold): it's just much cheaper.

First published in The Sunday Times 9/3/08

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.