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Special Report

Investing in gold and silver - September 2012

Published by Investment Adviser | Sep 24, 2012

This year, September has been an outstanding month for gold bugs. The Federal Reserve embarked on another tranche of money-printing in the form of its third round of quantitative easing, potentially debasing the value of the world’s major reserve currency, the dollar. The European Central Bank (ECB) also announced an “unlimited” bond buying programme, possibly hinting at money printing to support it, if needs be.

According to Angelos Damaskos, chief executive of Sector Investment Managers and manager of the Junior Gold fund, these moves from the world’s two major central banks should prove positive for the gold price. “Following recent announcements indicating further money-printing by the Fed and the ECB it should not be surprising that the price of gold has resumed its uptrend, on course for its 12th successive annual gain. Importantly, it has broken the psychologically important level of $1,700/oz, widely seen by technical analysts as [a] key ‘resistance’ [level].”

Mr Damaskos warns that the Fed’s decision to introduce another round of quantitative easing could further stoke inflation and devalue the dollar, sparking renewed interest from investors seeking safety.

“This move is also excellent news for gold mining stocks that have been sold off and unloved by investors for over a year now. We are in the early stages of the next major re-rating for gold mining equities as a sector, particularly smaller to middle capitalisation companies. The share prices of those companies with strong balance sheets, good management, growing production and reserves are likely to outperform,” he says.

Alongside its use in jewellery and certain industrial processes, gold is effectively a replacement reserve currency, used to hedge against weakness in the purchasing power of other reserve currencies – most notably the dollar. As a result, it is often used by investors as a hedge against inflation.

In spite of such advantages, gold and other commodities have proved volatile for investors in recent years. Prior to the Fed and ECB announcements, Sheridan Admans, investment research manager at The Share Centre, observes that gold had weakened along with other commodities as the eurozone helped drag the world economy into a less inflationary scenario.

“For most of 2012 energy and hard commodities, gold aside, have been weaker as many European economies slip back into recession and even Germany, the powerhouse of Europe, has seen a slow-down in growth. This has also had an impact on China as weaker demand from Europe and the credit crisis continues to constrain money supply,” he says.

“Over the long term the emerging market growth story should continue to offer potential for investors. As these economies develop infrastructure to compete in the global market, this is likely to have an impact on the demand for commodities in the years to come. However, the volatility the sector exposes investors to is not going to go away as the credit crisis rumbles on.”

In the broader commodities sector, Mr Admans cites the JPMorgan Natural Resources fund as an investment portfolio worthy of attention from investors.

“Commodity valuations are looking better than they have for some time, so taking the long-term view of five years plus, investors should see some rewards from investing in a fund that has exposure to this sector,” he adds.

“This fund invests in a diversified portfolio of companies that are exposed to global resources and energy. It invests across three spectrums, with the portfolio roughly divided between gold, base metals and energy. It holds only equities and does not invest in direct commodities or exchange traded funds.”

As an investment, gold also faces more direct competition from other precious metals such as silver and platinum. When it comes to precious metals, investors usually see gold as the natural ‘go to’ investment. However, analysis carried out by Lloyds TSB reveals that the price of silver has outperformed that of gold over the past 10 years to the end of August.

Like many other areas of the resources marketplace, silver has had to evolve over time and has moved from being used only in jewellery and in the photography industry to profiting from applications in a range of industries, including solar panels, computers and security tags.

This growth in demand has been the main driver of the rising share price of silver – something commodity analysts expect to continue as the demand for the metal continues to outstrip supply.

Overall, when it comes to allocating part of a portfolio to natural resources - whether it be through exchange traded funds, open ended vehicles or by trading on price movements – it is important that investors look beyond the obvious hedging benefits of gold. Although past performance is no guide to the future, it is possible that alternatives like silver will continue to outshine the yellow metal for some time to come.

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