Gold a standout investment as central banks push to devalue currencies

GOLD is by far the best investment in the world this year and is a standout alternative to equities.

Gold has emerged as standout alternative to equities for investors seeking price growth

THIS week’s interest rate ­reduction is a turning point. It marks the moment the RBA ­unwillingly joined the global shift towards interest rate cutting where central banks move to lower the value of their national currencies. In doing so they each accelerate the stunning turnaround we are seeing in gold ­prices.

Gold is by far the best investment in the world this year. Since the start of January it has come roaring out of the blocks, ­especially when measured in Australian dollars, which is all that matters for the vast majority of local investors.

As interest rates drop here — and in a string of other economies such as Canada and Denmark — every investor needs to reassess both income requirements and where they will get price growth.

At the same time many observers are increasingly concerned that despite a run-up in both sharemarkets and property prices, the “real economy” of earnings, revenues and jobs is simply not good enough to justify these strengthening asset prices.

For investors seeking income, the 9.5 per cent jump in the markets over the last 11 days confirms again the allure of high-yielding stocks such as banks. Indeed a ­renewed “hunt for yield” has helped the ASX finally stagger over the 5800 mark — its highest point since 2008.

But for investors seeking sustainable price growth … a standout alternative to selecting equities is gold.

For Australian investors the prospects for gold offer an exceptional double whammy:

● The price of gold — always measured in US dollars — is ­rising.

● Meanwhile, our own currency (pushed along by lower rates and the prospect of further rate cuts) is falling against the US dollar.

As a result, while the gold price in US dollars has risen roughly 10 per cent since the beginning of the year, the gold price in Australian dollars has literally been twice as good. That is, around 25 per cent. (See chart)

At this point it might be entirely reasonable for an investor to ask …. what could keep gold moving up?

Nobody knows the future and forecasts for gold are almost as diverse as those for oil, but unlike oil where the political variables are endless, gold offers itself as a solution to both inflation and deflation scenarios — put simply it would appear to be a win-win in early 2015.

Indeed one of the world’s best known — and often gloomiest — investors, Marc Faber, managed in his typically histrionic fashion to nail the problem earlier this week in talking to The Wall Street Journal. He said in 2015 investors would suddenly realise what a scam central banking was and then they would lose confidence. And he said there was only one way to short central banks and that was to buy gold.

You might find the notion of central banking as a scam a little extreme but it is hard to doubt Faber’s logic. If central banks are printing money and cutting interest rates for currency imperatives rather than domestic considerations then we are in risky time … gold as a safe haven store of value — as the only alternative “currency” to the currencies that are the playthings of central banks — looks ever more attractive.

So how does a retail investor get into gold? There are three ways into the action with increased level of risk and reward at each stage.

● Simply purchase gold in its physical form and keep it in a safe. This is surely the safest and oldest way to enter the game.

Economist John Maynard Keynes called gold a “barbarous relic”, but he never witnessed central banks taking the sort of risks they are taking today. The issue with this method is that you must pay fees to keep and store gold, so worse than no dividend, you actually have to make regular payments to store the metal.

● Purchase an ASX-listed gold ETF (exchange-traded fund). This is the newest and in many ways the best option for gold investors. The ASX ETF scene remains undeveloped but there are now a number of locally listed ETFs such as ETFS Physical Gold (GOLD), Beta Shares Gold Bullion (QAU) or Perth Mint Gold (PMGOLD)

● Buy gold stocks. It might surprise you to hear that gold is easily the biggest single-stock category by volume of stock listings on the ASX. There are literally hundreds of small-cap gold stocks with a wide range of performance. Most investors steer towards gold stocks that have a market capitalisation of more than $100m such as St Barbara, Kingsgate, Medusa, Perseus and the biggest of the local listings, Newcrest.

All of these stocks have gained handsomely with the recent rise in the gold price, though almost all too have a spotted history. Newcresthas a dismal recent record and analysts have long argued it is overvalued. The shares of Newcrest, which has operations in Australia and PNG, have risen about 20 per cent this year against roughly 6 per cent for the broader ASX 200.

For my money it is hard to beat ETFs, especially if you are wary of individual gold stocks.

One last thing, you recall that one of the key reasons gold prices are rising is that central banks are printing money — paradoxically central banks are also insuring against the inherent risks of their own decisions by buying gold. The IMF reports central banks are now net buyers of gold after being net sellers for 20 years to 2010.

James Kirby is managing editor of Eureka Report.