Glitter, glamour and gold

Gold has long been seen by experts as a hedge against rising inflation and other challenges facing an investment portfolio
Sound advice Experts are warning their investors to reconsider how much of the commodity to keep within their portfolios
By Neil Parmar
Wed 05 Dec 2012 11:32 AM

Arran Marshall knew he had to pull off a rare investment stunt after he tied the knot and decided it was time to buy a home. And he did. He dusted off dozens of gold antique pocket watches from his personal collection, sold them off, then slapped down a 20 percent deposit for the new house.

While Marshall now works in Jakarta, Indonesia, as a mining and metals analyst for the financial advisory AWR Lloyd, he’s no expert on gold antiquities. Fortunately for him, though, his aunt and uncle are. As big-time antiquity traders in Marshall’s native land of Australia, they agreed to oversee his investment’s sale — for a share in the profits, of course.

“The thing with old pocket watches is the purity of the gold isn’t necessarily as good as it is today, so sometimes you had to be a little careful in terms of the actual value of gold sitting in your hand,” says Marshall.

Regardless of its exact form, gold has long been seen by some as a hedge against sinking stocks, rising inflation and other enemies of an investment portfolio. The commodity is now trading above $1,700 per ounce and has risen every year since 2001, when its low was around $250. Those who believe gold is ultimately still within a bull market — opinions are mixed — are increasingly finding new or unique ways to invest in the shimmering stuff. Some businesses and investors alike have poured fat fortunes into searching for the precious metal within the depths of seas. Others are now looking up to the skies.

Planetary Resources, for one, brands itself as an asteroid mining company and is financially backed by billionaire executives who started Google. While it aims to build low-cost robotic spacecraft to explore resource-rich asteroids, it also wants to dig for precious metals that could include deep deposits of gold.

To be sure, some of the latest investment options may seem downright weird or wacky. One investor at the American financial firm USAA, for example, purchased several hundred thousand dollars worth of gold filings — because they could be sold to dentists. Overall, global demand for gold is nervously back on the rise, increasing ten percent between the second and third quarter this year, to $57.6bn. This figure is still down eleven percent from a record year-earlier level, according to data from the World Gold Council, although there is growing interest coming from the East.

India now accounts for 30 percent of the world’s gold demand, while the Middle East makes up 10 percent of the market. Within the UAE, “the retail sector expects further growth as more and more household investors are turning to gold, particularly as an investment,” says Sunny Chittilappilly, who, as chairman of the Dubai Gold and Jewellery Group, represents around 600 members within the industry.

“Therefore demand for gold as commodity and an investment tool has only been rising,” he adds.

While many investors in the Middle East and India typically prefer to hold gold in the form of jewellery, others around the world say there are various alternatives that may yield high returns. But, experts warn, these options also come loaded with plenty of risk. Ken Fried, who manages a New York City-based venture fund called Lightseed Capital, has put some of his investments in a company called Odyssey Marine Exploration. The business trades on the NASDAQ and explores deep-ocean shipwrecks, by searching for treasure such as gold coins. Even though Fried says his investment has ridden up and down waves over the years — and is now back around the level that the stock originally cost him — he’s holding onto it because he believes Odyssey may recover more gold and silver bullion from modern-day wrecks in the future.

“Given the depleting nature of traditional terrestrial gold mines, attention is shifting toward non-conventional sources,” says Fried.

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A gold exchange-traded fund (ETF) is another less conventional option some investors around the world are considering, says Chittilappilly. It was only a decade ago when the first gold ETF launched — Gold Bullion Securities — and there are now more than a dozen different options around the world, including the popular SPDR Gold Shares which trades under the ticker GLD. Typically, a portion of each gold ETF is pegged to the price of gold, and investors never have to worry about actually storing any of the precious metal. Within this group, however, the performance of different ETFs has been mixed, and just as there is a “making” charge often associated with pieces of gold purchased in the UAE, there is usually a management fee or other costs tied to the funds.

Similarly, gold-related mutual funds have rolled out for investors who want to take advantage of price fluctuations in what can be a volatile market. Some advisors aren’t fans of this option, however, because the mutual fund companies broadly state they have precious metal investments — even if the holdings aren’t directly in gold. “If you look under the hood it’s all mining stocks,” warns Tim Higgins, a financial planner in Southborough, Massachusetts.

“It’s not having exposure to the metals and those prices. The mining stocks have underperformed compared to the metal itself,” adds Higgins.

Some gold bugs today prefer holding actual coins over stocks or different kinds of funds tied to their favourite commodity. Matthew Erskine, who’s a financial advisor in the US, flipped $20 pieces of numismatic gold that cost an average of $325 an ounce a decade ago for $1,200 per ounce just five years later. One of his clients, meanwhile, has built an entire family foundation based on the rising value of a roughly 7,000 coins. Some experts note that investors don’t always exit at the ideal time, and end up missing out on a great return. Marshall, whose collection of shimmering timekeepers yielded enough to prepay for one-fifth of his house, ultimately felt disheartened by the transaction.

“There’s not much interest in pocket watches,” he acknowledges. “I thought it was going to be worth ‘this much,’ then was a little a disappointed with what I ended up with.”

Certain expats living in the Middle East may also have the option to hold a gold-based retirement account in their home country. Last year, Standard Life in England began offering pension investors the option to buy or sell gold bullion. In the US, people can use a gold account to keep the commodity secured in a vault until they want to sell it off or pass it onto their heirs. The number of people expressing an interest in these kinds of accounts within the US has more than tripled this year at Broad Financial, while those who actually opened a gold retirement account has increased more than five times over the past two years at The Entrust Group, according to executives at the two companies. Remember, though, that these accounts also have fees. At Entrust, it costs $150 each year for administrative services plus $95 to $160 for annual storage.

With the recent run-up in the price of gold, some advisors are warning their investors to reconsider how much of the commodity to keep within their portfolios. (Experts generally agree that people should limit their gold holdings to between five and ten percent). Even some fans of the metal have made conscious efforts to protect themselves against the volatile price fluctuations of gold. Hence, Marshall’s affinity for gold pocket watches that have historic stories behind them.

“Although you’ve got to be sceptical of gold pricing to some extent, especially after what happened in the 1980s, I always used antiquities as a hedge, so if gold price fell you still had value in the actual antiquity itself,” says Marshall.

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