Nothing as good as gold - for now

By Sid Astbury Aug 10, 2011, 4:25 GMT

Sydney - As an asset class, gold has not had a setback in a decade and so far this year has gained 23 per cent in value.

But if there is nothing as good as gold, how come the cardboard kiosk at Sydney's Marrickville Metro shopping centre is not besieged by people answering the call to trade in their unwanted jewellery for hard cash?

The logical reason, according to Australian investment guru Paul Clitheroe, is that tying up money in precious metal means to forgo the dividends and interest payments that come with stock market investments or bank deposits.

'Investors need to weigh up the value of ongoing returns that could be earned on alternative assets, as well as the possibility that the price of gold could plateau or even fall in the future,' he wrote in Money Magazine.

A less logical reason is that, for the past 10 years at least, there has not been a good time to buy gold: it has just gone up and up in value.

The flip side of the stellar gain since January is that those who cashed in their trinkets just after Christmas would be 23-per-cent better off if they had delayed the sale until now.

Market analysts see gold powering on from its current 1,750 US dollars an ounce to more than 2,000 US dollars next year.

'Uncertainty is the friend of gold,' Sandra Close, a director of mining consultancy Surbiton Associates Pty Ltd, said in the Australian firm's most recent outlook statement. 'And many of the factors causing uncertainty in the current market are not going to disappear quickly.'

At first glance, the outlook for gold is indeed glittery. Demand is rising strongly - there are 10 million weddings a year in newly wealthy India and gold is the traditional gift - but supply is stagnant.

In Australia, the world's second-largest producer after China, gold production peaked at 318 tons in 1997 and last year was 266 tons. In both the United States and South Africa, output is flat.

But the potential downside is sharp.

'If you're thinking of investing in gold because the price is rising or because you're concerned about the global economic outlook, you need to be very wary of the gold bubble bursting,' Clitheroe said.

Central banks, like China's, have heaps of bullion they could unload on the market and prick that bubble.

It has happened before: on a single day in November 1997, Australia sold two-thirds of its stockpile.

And if gold really is a surefire investment, why is it that listed Australian prospectors are not doing better than they are?

One reason is that, if gold dipped sharply, smaller producers would be wiped out. Mining gold is costly and laborious, lodes often prove less bountiful than in the prospectus, and share prices do not mirror upward movements in the gold price.

On Tuesday, investors poring over the announcements to the Australia stock exchange had one exciting bit of news and one not-so-exciting.

Domino Pizza Enterprises Ltd, the nation's biggest pizza chain, trumpeted a full-year net profit up 20 per cent on 2010, its fourth good result in a row.

Also reporting was Golden Rim Resources Ltd, a gold miner with a West African focus that informed the market that it had come up with good samples from a prospective 7.1-kilometre seam in Burkino Faso.

For the personal investor tempted to cash in their jewellery at the shopping centre, the dilemma is between a safer investment in pizza parlours at home, or taking a chance with a seemingly golden opportunity in deepest Africa.