Financial crisis: demand for gold soars as price tumbles

Investors have rushed to buy gold bars and bought exchange traded funds, worth US$2.8 billion - the biggest inflow on record.

The onset of a global recession and falling stock markets have triggered a stampede for gold - the traditional safe haven during times of uncertainty.

According to the World Gold Council, exchange traded funds are the main beneficiary of the flight to safety. ETFs experienced their strongest quarterly inflow during the third quarter since SPDR®Gold Shares - the first gold ETFs - were launched in November 2004.

But the Council added that bullion dealers around the world reported an unprecedented surge in demand for coins and small bars. It said that there had been reports outright shortages of gold and high premiums over the gold spot price. The US Mint temporarily suspended sales of American Buffalo gold 1 ounce coins after its stocks were depleted, while UK, German and Austrian coin dealers have also reported an enormous increase in demand during the third quarter, it added.

The average gold price edged down slightly between June and September, to $870.88/oz, from $896.11/oz in the previous three months. Gold traded as high as $986/oz on July 15, the day after the US Treasury and Federal Reserve Bank announced plans for a joint bail-out of mortgage giants Fannie Mae and Freddie Mac, but fell sharply later in the quarter to a low of $740.75/oz on September 11. This proved short lived, however. By the end of the quarter, the gold price had rebounded to $884.50/oz.

Yesterday, gold was trading at $729.20 an ounce after hitting intraday low of $718.20 — its lowest level since September 2007.

There is an increasingly wide range of methods available to investors wanting to buy gold or gain exposure to gold price movements - from gold coins to complex structured financial products
Exchange-traded funds

These are not technically funds because they follow a single security. ETF gold securities are traded on the London Stock Exchange. They essentially track the gold price and can be traded daily - all you pay is the dealing charge of around 0.4 per cent. They are also regulated financial products. Visit www.exchangetradedgold.com or www.etfsecurities.com for more information.
Unit trusts and investment trusts

These are few and far between, the most popular being BlackRock Merrill Lynch Gold & General, which invests in the shares of gold mining companies as well as other commodity businesses. Advisers reckon general commodity funds could also do the job for private investors as they dabble in gold-related stocks - JPM Natural Resources and ACDS Australia Natural Resources remain popular. Gold mining equities tend to be more volatile than the gold price.
Coins and small bars

Bullion coins and small bars offer private investors an attractive way of investing in relatively small amounts of gold and they are exempt from VAT. Bullion coins and small bullion bars contain a minimum of 99.5 per cent fine gold. Gold bars start at around pounds 39 for a 2.5g bar, rising to pounds 11,957 for a 1kg bar. Visit bullion dealers such as Baird & Co (www.goldline.co.uk).
Gold accounts

Gold bullion banks offer two types of gold account - allocated and unallocated. An allocated account is effectively like keeping gold in a safety deposit box and is the most secure form of investment in physical gold. The gold is stored in a vault owned and managed by a recognised bullion dealer or depository.

With an unallocated account, on the other hand, investors do not have specific bars allotted to them. Traditionally, one advantage of unallocated accounts has been the absence of any storage or insurance charges, because the bank reserves the right to lease the gold out.

* For more information - www.invest.gold.org/sites/en/where_to_invest/directory

Telegraph | Paul Farrow | Thursday, October 23, 2008