A golden opportunity beckons but can the metal keeps its shine
Investors turn to gold in times of trouble, but the herd instinct has run riot
GOLD is a bubble and wise inves-tors would do well to avoid its charms. You would think that in this country, after getting so badly burned by the property bubble, we would be wise to another ballooning bubble. But not a bit of it.
As in a lot of countries at the moment, gold is proving to be a very popular investment.
Investors generally buy gold as a hedge against any economic or currency crises. But gold is displaying the classic characteristics of a bubble, and investors need to be careful that this is not the year that it bursts.
A bubble occurs when a particular investment performs particularly well. This tends to draw the attention of investors. This in turn leads to more money being put into the investment which causes further price rises.
Investors get even more confident. This leads to an upward spiral that takes prices far above the levels which can be justified by any rational assessment of the real value of the future cash flows an investment may generate.
The gold bubble could stay inflated for a while. But that doesn't make gold less speculative and risky than it was a year ago.
However, investors need to note that you will never look too wise tying to call a bubble.
This week gold tipped over $1,500 an ounce, up from less than $500 just five years ago. That works out an eye-popping annualised return of 23pc.
Fear is driving the price ever upwards. Investors have always turned to gold in times of trouble, but it is questionable if rises like this can be maintained.
If you like bling, then gold is the thing.
But if you are buying gold as an investment you need to consider that it is nothing more than a bet that someone else will be prepared to pay more for it tomorrow than you did.
This year could mark the last of the heydays for gold, warns Pat McCormack of Barclays Bank Ireland.
"The dollar isn't about to collapse, hyperinflation is not lurking around the corner, the gold price has already risen a long way and there is no yield -- nor any prospect of one.
"It wouldn't be a surprise to see gold at some stage fall by 20pc to 30pc if investors were to regain confidence in other assets."
You should never have more than 5pc of your investment portfolio in gold. This is especially so as gold has few industrial uses.
Almost every industrial use of gold is also an industrial use of silver. Since silver is much cheaper than gold you can imagine that people would rather use silver than gold for industrial purposes.
And gold does not pay you a return, unlike a share or a deposit.
With a share you have some hope of getting your money back over time from dividends.
In fact, if gold were a house, it would be one you could not live in and could not get rent from.
One of the richest men in the world, and truly the most successful investor of our time, Warren Buffett, is not a gold bug.
Speaking about gold, he said recently: "Look, you could take all the gold that's ever been mined and it would fill a cube 67 feet in each direction.
"For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal.
"Which would you take? Which is going to produce more value?"
It is hard to argue against the Sage of Omaha.