Personal Finance: Less stick for carats

Gold has been a bad investment for decades. As banks sell off their holdings, this is set to change.

GOLD HAS proved to be a really bad investment for most of the last two decades, and it could get worse before it gets better. But there could be a silver lining in sight and within the next 12 months, gold bars and coins could start giving cash, bonds and shares a run for their money and competing for a place in the typical investment portfolio.

Worldwide, demand for gold for industrial uses and for jewellery is now 50 per cent greater than the new supply but there may be 20-30 years of excess supply stored in the vaults of central banks, quite apart from private hoards of gold and jewellery, especially in Asia.

But gold costs money to store and earns no interest in private hands, and is no longer in demand as a hedge against inflation. Prices have slumped from a peak of over $800 an ounce in 1981 to less than $260 now. In real terms it is back where it started in 1972 when the US Treasury stopped selling gold at $35 an ounce and sent the price soaring.

The price has fallen more than 10 per cent this year alone, since the Swiss voted to abolish the backing for the Swiss franc and sell an estimated 1,300 tons of surplus gold, starting next year.

The IMF is now threatening to sell over 300 tons to set up an investment fund for the 40 poorest countries, and on 6 July the Bank of England will start auctioning 25 tons of UK gold each quarter to invest in more profitable assets.

According to Bob Beasley, an analyst at Barclays Capital, the price of gold could fall further to $220-230 an ounce in the next few months as these official sales drive another nail in gold's coffin.

For UK investors all this has been academic however. Sovereigns were withdrawn from circulation during the First World War and replaced by pound notes, and only registered collectors were allowed to hold the coins.

Although the legal right to ownership was restored in 1979, gold and gold coins have never recaptured the British public's imagination, partly because they have never been promoted here, either as an investment medium or a store of value, and partly because they have been liable to VAT, which for the great majority of people means that VAT charged on purchases cannot be recovered when the coins are sold.

Even the parvenu Krugerrand, which was minted by the South Africans and sold wholesale for little more than its gold content has never made much impact in the UK, and the Royal Mint now confines itself to minting proof sets for collectors at prices well in excess of the bullion content.

Coin dealers like Spinks are more interested in selling rare coins, of any metal, the banks which trade on the London Bullion market have never been interested in retail sales and the handful of jewellers who have been willing to deal with the public were free to put a substantial profit margin on their selling prices.

Even now the cheapest unofficial retail price for sovereigns is around pounds 46, compared with a wholesale price of pounds 39 and most jewellers will not buy coins back from the public at any price.

But all this could be about to change. David Clementi, the Deputy Governor of the Bank of England told a conference on gold this week that the Bank is acting in the interests of "minimising uncertainty and stimulating interest in gold as an investment".

Superficially that could be another example of Hutber's Law which says that "better" actually means "worse".

But the next few months could actually mark a turning point in the prospects. From 1 January, VAT will no longer be charged on investment gold, including coins minted since 1800. After a decade of bemoaning the fall in gold prices the World Gold Council which represents the gold mines is seriously thinking of campaigning to promote retail sales in places like the UK, and encouraging banks, brokers and retail outlets to start making a market in coins.

If David Clementi really means what he says, by then prices could be low enough to make gold coins a convenient and attractive part of every balanced investment portfolio.