I’ve never bought gold before – but I’m buying it now

I’m 46 years old, and I’m about to invest in gold for the first time in my life.

You see, unlike most MoneyWeek writers, I’ve always been a big sceptic when it came to gold.

I’ve struggled to understand why people ascribe so much value to the metal. Apart from jewellery, it has virtually no use. Gold is only valuable because people say it’s valuable.

What’s more, I’m not keen on assets that never pay an income. And don’t get me started on the quasi-religious fervour of gold bugs.

But now I’ve changed my mind. I’m going to make a small investment in bullion. Here’s why…

Why I’ve changed my mind on gold

Before I go any further, I should acknowledge that many investors have made big profits from gold over the last 14 years. At the turn of the millennium, the gold price was just $288 an ounce; in May 2011, it reached above $1,900. So my scepticism on gold caused me to miss out on big gains.

However, it’s not my past mistakes that have made me change my mind. My ‘conversion’ was triggered by an article in the FT last week, entitled Gold analysts most bearish since 2002. 

This article said that gold analysts expect the gold price to average $1,219 per ounce this year, just below the current price of $1,243. Analysts cited a potential rise in the US dollar, and a possible oversupply of gold to support their view.

You might think that this pessimism would keep me away from gold. But the article just brought out my inner contrarian.

You see, the analysts got their predictions very wrong last year (for a change, the more cynical among you might say). They predicted that the average gold price for 2013 would be over $1,700. In reality, the gold price fell 30% over the year, and the average price ended up being $1,411. So red faces all round for the ‘experts’.

And as I thought about it some more, I began to think that the gold price is too low. For starters, the gold price is now roughly at the level that covers the ‘all-in’ cost of production, so it’s hard to see the gold price going much lower than this. And if the price did fall below $1,200, you’d expect to see a fall in gold production, which would then push the price back up.

I’ve also been told that demand for gold from central banks – especially emerging-market central banks – remains strong. It makes sense that these banks want to diversify away from the dollar.

And don’t forget, deflation is back on the agenda right now – or if not deflation, then low inflation. Now people more readily associate gold with being a hedge against rampant inflation. But if we get falling prices, or inflation stays low, then that should actually be good for gold.

After all, if you’re not getting much income from a bond, the fact that you don’t get any income from gold is not as a big a problem as it might be if real (after-inflation) bond yields were high.

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The US taper is also really important here. I suspect that the current gold price assumes that the Fed is able to achieve a nice smooth taper this year.  In other words, the market is still hoping that further reductions in bond purchases won’t trigger any market turbulence.

Now it’s possible that we’ll get a nice smooth taper. But given the mini-panic we’ve just had, and the one we had last May when the idea of the taper was first floated, the chance of more volatility looks high. And if we get that volatility, it’s not unreasonable to think that the gold price will move upwards.

An insurance policy that could turn a nice profit

As several MoneyWeek writers have argued,  gold can provide some insurance to an investment portfolio. If you don’t believe that’s the case, just look at the gold price chart during the financial crisis. Sure, there was a small fall early on – but then gold moved firmly upwards while other assets were still in the doldrums.

Given that we may well get some market volatility this year, I quite fancy some insurance. And the fact that sentiment (ie as represented by all those analysts) has turned against this insurance policy just increases the attraction.

So at some point over the next week, I’m going to buy some physical gold via an exchange-traded fund (ETF). It’s not going to be a massive investment – no more than 5% of my portfolio – but I’m happy to take the plunge now. An insurance policy that could also deliver a decent profit sounds good to me.

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