Exchange traded commodities make it cheap to hold and trade gold.
Gold exchange traded commodities (ETCs), as opposed to exchange traded notes, are well conceived so long as they are correctly administered.
The key characteristic is that the fund's physical gold should account for the whole of the fund's market capitalisation and that the auditing of the gold should be transparent to the ETC's investors.
There's some controversy around the physical gold holdings of some ETCs so that it looks as if collectively they need to clean up their act. That's feasible but I suspect that, as government and regulators probably aren't that keen on massive gold investments by private investors, we may wait for a long time for more transparency.
What's particularly good about gold (and other physically-based) ETCs is that unlike funds that track commodity indices, a gold ETC really will track the price of gold. Also, gold ETCs generally have high trading volumes and excellent liquidity. Gold Bullion Securities (LSE: GBS) currently has a spread of 5 cents a share, less than 0.05% of the price. Typically, expense ratios for gold ETCs are in the region of 0.4%.
Going for gold -- the current debate
ETCs have certainly had a major positive impact on the ease with which private investors can invest in gold but gold as investment proposition has become highly controversial. On the one side are investors who see the $1,000 price as just a stage on the way to greater things; on the other, those who keep reminding us of gold's eclipse during the eighties and nineties.
Taking gold's recent track record first of all, the long-term decline at the end of the 20th Century doesn't tell us much about the current situation. Investors thought they had excellent reasons to shun gold because of the bull market in equities, because inflation was diminishing and because, after the collapse of the Iron Curtain, people thought that we were at the start of a better world order. There were anxious times, too, but more often than not, things were looking up.
The next twenty years hold out no such promise. The fear of inflation may be turn out to have been overdone but there's no denying the fear is there. Likewise, world leaders may well chart a course through all the current dangers but the world order can't be taken for granted.
The period 1980-2000 was a particularly bad time for gold but it doesn't look likely to be repeated.
Has gold's time come around?
But this does not necessarily mean that now gold investing is bound to be richly rewarding from here on. When the financial crisis was at it height last autumn, the gold price fell -- it seemed to fail investors just at the time that they may have needed it the most.
True, the gold price rose steeply from November to February this year and it looks as if that rise was investors seeking safety. It's also true that the price has held up well since but it's only the dollar price of gold that's broken records; against other important currencies the peak was in February.
It looks as if gold's moderate strength is due more to the strength of asset prices in general than the kind of climate of anxiety that has made gold most attractive in the past.
Gold's own uncertainty
Indeed, far from providing shelter from uncertainty, gold has some risks of its own.
To put gold ETCs in context, the total amount of gold backing ETCs is dwarfed by the tonnes held by central banks around the world (especially the Federal Reserve and the ECB together with the central banks of the Eurozone countries). Admittedly, the world's leading gold ETC, SPDR Gold Shares, currently holds more gold than the Swiss National Bank but overall the world's finance ministers and central bankers have a lot more gold at their disposal than private investors.
Is there any danger of big a gold sell-off by central banks? This depends on whether the dollar survives as the world's reserve currency. If there was an attempt to orchestrate an alternative reserve currency, gold could be a component and the continental Europeans and the Americans would hang on to their gold. However, there would also be a concerted effort to keep the price of gold steady -- even, perhaps, measures to stop private investors holding it.
Alternatively, the dollar's reserve currency status could survive and at least some European finance ministers may be tempted to sell of gold reserves in large amounts -- and under considerably more pressure than Gordon Brown was in 1999. Large gold reserves are a seen as a positive feature of the euro, lending weight to its reputation as a strong currency, but member states are not forbidden to sell their gold. And just now they may be thinking that the euro is too strong in any case.
The one formal constraint on gold sales that's in place is the Central Bank Gold Agreement under which gold sales by 19 continental countries are currently limited to 400 tonnes until 2014. This is a small amount (about 0.25% of gold above ground but roughly one quarter of the total gold backing gold ETCs) but the agreement will only last for as long as it suits the signatories.
After all, the same Eurozone states are supposed to keep national debt below 60% of GDP and that was a dead letter for Italy, Germany and France in 2007! Furthermore, the IMF will shortly be beginning to sell its gold for the first time in almost forty years.
So governments' policies on gold could have adverse effects for those who have invested heavily. Yes, gold may deserve a place in a portfolio as liquid asset. At times it can be a good hedge against an exchange rate loss or a stock market fall, but personally I don't expect big increase in the gold price in the near term.
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Francis owns shares in Gold Bullion Securities.
