Gold: What might go wrong?

Many in the market- and not just gold promoters- believe the commodity may have a long way to go. Picture: AFP

As gold crests a record price above $US2000 and a new generation of investors ride the rise of the yellow metal, the question looms...what might go wrong?

New investors might be surprised to hear the gold price can plunge just as fast as it soars - in 2013 the price of gold fell by 35 per cent in less than six months as the “taper tantrum” caused a spike in bond yields and a parallel fall in bullion prices.

Or perhaps it might be news to hear that the Australian government under the terms of the Banking Act can still confiscate gold from investors.

This time round, the gold price rally involves “mum and dad” investors in a fashion never seen before as the Exchange Traded Fund industry allows investors to participate in the rally for as little as $500.

Certainly the very rapid run up in gold prices has returned the commodity to the forefront of investment debate along with a range of issues that gold investors might do well to consider.

In the latest edition of the Money Cafe Podcast (which I co-host with Alan Kohler), our guest Doug Turek of Professional Wealth raised the ire of some listeners with a lengthy list of concerns surrounding gold as an investment.

Turek who has appeared in The List- Australia’s Top Financial Advisers every year since its inception in 2017, spelled out three key concerns:

1. If gold can plunge as it did in 2013, then it cannot be considered as a “store of value” in the same manner as, say, cash, which is not at risk of dropping in value.

2. When the price of physical gold is rising rapidly - as it has throughout 2020 - can the global ETF market fulfil its requirements for bullion? In other words, if every investor asked every ETF for their investment value in physical gold the ETF market would face a severe test.

3. The compulsory confiscation of gold by governments in times of crisis has occurred repeatedly and cannot be ruled out in any jurisdiction.

Perhaps the most contentious of Turek’s observations is that gold can be confiscated by national governments.

Historically, the Australian government - unlike the US government - has not confiscated gold, but it has taxed it heavily. A gold tax to fund the war effort was launched in 1939.

What’s more, the Australian government retains constitutional powers to confiscate gold under the Banking Act 1959 part 4 - the powers under the Act were suspended, but not repealed, back in 1976 when the Fraser government’s Phillip Lynch was Treasurer.

Gold commentators, such as John Adams, chief economist at Good as Gold Australia, have since called on the government to repeal the provision.

David Bassanese, the chief economist at BetaShares, points out that as a globally traded commodity, gold is regularly hit by different restrictions in different countries.

Meanwhile, many in the market - and not just gold promoters - believe the commodity might have a long way to go.

Andy Semple of the Andika group says in a note released this week that gold is the best-performing asset class in the world over the past 12 months, beating all comers including US-based stocks.

“Gold’s performance since the market bottomed on March 23 2020 is still in its early stages. Should gold emulate what it did during the period of March 2009 to September 2011 we could actually see the price of gold double from current pricing,” Semple explains.