Expatriate Forums in Cambodia

Alvin

ONE of the best-performing "safe haven" investments over the financial crisis was one it's a safe bet to assume even your financial planners hadn't noticed - but don't be too hard on them for that.

Spinner Dolphin teeth, widely used as currency in the Solomon Islands before the Europeans arrived, leapt in value from about 5 US cents to near 30 cents as bad times arrived.

"Dolphin teeth are like gold," the governor of the nation's central bank told the Wall Street Journal. "You keep them as a store of wealth."

As one dolphin hunter said: "People want more teeth, and it's not that easy to get dolphins."

Which is one of the reasons their value grew, of course, and one of the reasons "gold bugs" find the precious metal so attractive.

Tough times, on the face of it, should be an ideal one to invest in gold that traditionally comes into favour when banks are failing, real interest rates are falling and there are fears of social unrest, rioting or wars. Investors generally buy gold to reap the rewards of rising prices amid economic and political uncertainty or as a safe haven when other financial products seem uncertain.

Even now, with stability returning to financial markets, gold has continued to rally as debt fears take their toll on the US dollar.

However, the whole issue of investing in gold is not as simple as that and for the smaller investor there are pitfalls that should be taken into account.

The first is how you actually buy the metal. That can be done through either "bullion" - physical gold bars - in gold coins such as the famous South African Krugerrand, or through exchange-traded gold funds or certificates of deposit.

If your primary fear is of the failure of financial institutions, as was the case in the recent global financial crisis, you should avoid funds or certificates, as these are only as secure as the institutions that issue them. Instead you should hold physical gold in either bars or coins. Coins are convenient and a favourite among survivalists types who believe they will become common tender in the event of a breakdown in civil order. It is also an easy way to hold the metal even if your view is less apocalyptic but for the convenience of a coin, you will be expected to pay a premium on the price of the actual metal.

Gold bars in various weights, are considered the best way to invest in gold but they also raise problems of storage and the threat that if conditions really did become too bad, many governments will simply confiscate your holdings.

The US government did exactly this during the Great Depression of the 1930s when President Roosevelt outlawed gold-ownership by US citizens.

Gold went into the new century in bullish mood, the terrorist attacks on the United States in 2001 creating the climate of uncertainty in which gold flourishes.

Spare a thought for British prime Minister Gordon Brown (and take note of how badly wrong you can get investment timing with the metal) who between 1999 and 2002, sold 400 tons of bullion - half the holdings of the Bank of England - in a series of auctions when the price was at a 20-year low of around $270 an ounce.

Gold prices hit a peak above $1000 an ounce in March 2008 before falling back to just over $700 by early October. As the scale of the financial crisis became clear, the gold price rose rapidly to hit new heights, just above $1000 on 20 February this year. Since then, the concerted actions by governments to the crisis, the hope inspired by President Obama's inauguration and the threat of central bank sales eased the price that is now just over $900. Now the threat from global financial system collapse has passed, however, investors are focusing on the still fragile state of the US economy and the massive debt burden authorities have taken on. That has led to pressure on the greenback and gold has surged back to March 2008 peaks above $1000.

That short history gives some indication of what the gold bug must take into account. The gold price is very reactive to events, rising rapidly on bad news but falling just as fast as optimism rises.

Remember, holding gold is all about where you think the price will go. Unlike other investments, gold does not earn interest, nor does it grow by sitting in a bank vault. Given better times, investors will always seek better returns.

However, the greatest impact on the gold price comes from governments and the International Monetary Fund, the biggest holders of the metal in the world.

Since the financial crisis struck, the threat of a big sell-off of bullion by governments and the IMF has cast a pall over an otherwise bull market of the past year. Recent gold selling by the European Central Bank and weak imports in India also helped contain gold prices.

Governments and the IMF hold nearly 20 per cent of above-ground gold in the world. A sell-off by central banks or the IMF could override concerns that give gold its safe-haven lustre bringing more prosaic concerns about supply and demand into play.

Those very fears appeared to be justified at the close of the G20 meeting in London when a sale of IMF gold to raise funds to help shore up ailing economies round the world was discussed.

The IMF is the third-largest holder of gold reserves after the U.S. and Germany, with 3,217 tons in deposits, according to the producer-funded World Gold Council.

Gold traders say the decision was a factor in the price slipping, although not as big a one as the early signs that equity markets may have turned the corner.

The authorities were quick to assure gold bugs that any IMF sale would be a "phased and Morgan Stanley gold analysts did not believe the sale would be a "strong negative risk to gold prices" as most of the IMF sales would be off market and China, over-exposed to US Treasuries, Russia and India would, in any case, be likely willing counter-parties to any sale.

Nevertheless, the news is a good indicator of some of the issues facing the prospective gold investor.

On balance, large holdings of the metal make little sense for the average investor. However, there is a compromise gold investment in the form of gold mining companies' stock. Although these shares will track the gold price lower should the metal fall they will also benefit from any upside.

And one thing we can say with absolute certainty, they will always find a more ready market than dolphin teeth.