Lure of gold pulls in NZ investors
Speculation that the price of gold could go past US$2000 ($2448) an ounce by the end of the year is encouraging more people to buy the precious metal as a hedge against economic uncertainty.
Gold has been a traditional safe-haven investment in the United States, Europe and many developing countries such as India and China, but has not generally been part of most New Zealanders' investment plans, although that may be starting to change.
A resurgence of interest in gold and other precious metals is being driven by worries over moves by central banks in Europe and the US to solve their financial difficulties through quantitative easing - often referred to as printing money.
The theory is that as central banks make credit more readily available it will drive down the value of their currencies and drive up the price of gold.
Gary Warner, a senior client adviser with investment broking firm Edge Capital Markets, is an enthusiastic believer in the theory and is recommending gold to his clients.
"I'm not saying to people sell your house and put it into gold or put everything you've got into gold. What I'm saying is that you should have at least 10 per cent of your wealth in gold," he said.
However, Warner admits that personally, he would invest more than that in the metal.
Warner believes the spot price of gold will hit US$2000 an ounce by the end of the year, but doesn't think it will stop there.
"The onslaught of gold in terms of the big up [in prices] hasn't even got going yet," he said.
"I believe gold in the next 12 months will go above US$2000 and potentially head towards US$3000."
He said the main drivers for such a dramatic rise would be the ongoing and possibly worsening economic crises in Europe, the US Government's policy of unlimited quantitative easing and the Chinese Government's efforts to build up its gold reserves, something he believes is part of a broader plan by the Chinese to eventually position their currency to usurp the US dollar as the world's major trading currency.
"At the moment the Chinese Government is a huge buyer of gold but they are doing it very quietly," he said.
There are two main ways investors can buy gold. They can either buy shares in gold-mining companies, or purchase the metal itself.
Warner said he favours buying the metal rather than shares, because even when the price of gold is high, the price of mining shares will fall when the broader sharemarket heads into a downturn.
On the local front, there appear to be growing numbers of people who share Warner's view.
Hayden Syers, the head of bullion at NZ Mint, said a noticeable feature of the market at the moment was the number of inquiries he was fielding from both experienced investors and first-time gold buyers.
Experienced investors who were active buyers last year were returning to the market to buy more, while novices were testing the water by making small purchases, he said.
In both cases this was being driven by speculation that the international spot price of gold could hit US$2000 per troy ounce by the end of the year, up from US$1769 on Friday.
Syers said experienced investors tended to buy bullion bars, with a one-kilogram gold bar currently costing about $72,000, while novices tended to enter the market by buying between one and 10 gold bullion coins, which cost about $2300 each.
These could be the Gold Kiwi, which NZ Mint produces, or internationally traded bullion coins such as the Australian Kangaroo or Canadian Maple.
As investors became more experienced and confident, they tended to move from buying coins to bars, Syers said.
He said there was no discernible pattern in the types of people who were buying gold, saying they formed a broad cross- section of the community.
Syers said an unusual feature of the market at the moment was the number of Americans coming to this country on holiday and bringing their gold with them to deposit in NZ Mint's vaults for safekeeping.
He believed this was because American investors had institutional memories of the 1930s when the US Government compulsorily acquired private gold holdings.
Many Americans were so concerned about the state of their economy that they believed such a situation could arise again, and were moving their gold overseas to put it beyond the reach of US authorities.
HOW TO BUY GOLD
Buying gold bullion is relatively straightforward, however there are a few basics the novice investor needs to be familiar with.
Gold, like other internationally traded commodities such as oil, is always priced in US dollars. As such, its value to New Zealand investors is affected by movements in the exchange rate, as well as changes in the price at which it trades on world markets.
So when considering buying or selling gold, investors need to form a view on where the Kiwi dollar is headed, as well as the direction of the underlying gold price.
The gold price is always quoted per troy ounce. A troy ounce is equal to 31.103476 grams, so a kilogram of pure gold would be equivalent to about 32.15 troy ounces.
Most of the gold bought as an investment is purchased as bullion coins or gold bars.
Pure gold coins such as the Australian Kangaroo manufactured by the Perth Mint and the Canadian Maple, are traded internationally and recognised by gold dealers throughout the world.
Coins are more expensive to purchase than the same weight of gold bars, because of the cost of minting them.
Gold dealers also add a margin into the price of gold they sell you (over and above the commodity price). And they will buy back gold for less than the price they sell it at.
The difference between the price dealers will sell you gold and the price they will buy it back is called the price spread. This price spread provides the dealers with the revenue to operate their businesses.
For example, last week NZ Mint would sell a one ounce gold Kiwi coin for $2328.30 and buy it back for $2055.49, giving a spread of $272.81 per coin.
So the price of gold would need to increase by that amount before you could sell the coin for the same price you paid for it.
The spread on larger gold bars is usually less than the spread on smaller ones.
Many dealers will store gold for you in their vaults for a percentage of its purchase price, which often includes insurance cover.
Otherwise you could store it in a safety deposit box. A small one can be rented for about $150 a year.
- © Fairfax NZ News