The great gold rush of 2003

LYTHAM Road in Blackpool is not where you would expect to find one of the country's biggest individual gold dealers, if only because you would expect such a business to be based in central London, not a seaside town renowned only for its tower and illuminations. But Lawrence Chard set up shop there in 1968 and has stayed ever since, buying and selling gold coins and bullion, Krugerrands, sovereigns and gold bars. He deals mainly with private clients - people with pounds 1 million or less who are too small for banks or investment houses to get involved with.

Asked who is buying gold at the moment, Chard says: "Everyone and his mother. The number of people buying has doubled since last year and the amount of money they are spending has also doubled.

Six-figure sums are now fairly commonplace and as an investment market it is very strong." His investment advice website taxfreegold.co.uk received 67,000 hits on a single day last week against an average of 22,000 in November and December.

The World Gold Council, based in Pall Mall and with a remit to promote the metal, reports a similar scenario. Analyst Rhona O'Connell, says: "Over the last few months our phones have been ringing off the hook, emails have been coming in, our website hits are up, mainly from the man in the street wanting to know how to invest, how to buy, where to buy, whether it is better to buy bullion or coins.

"Then there has been the hedge fund managers, professional investors, money men, genuine risk managers coming in from all over the world - a good spread of interest."

MIKE Temple, director of Gold Investment Ltd, a company that requires a minimum investment of 100 ounces, or around pounds 22,000- pounds 23,000, reports "a flow into physical gold from all walks of life, from fund managers to individual clients, there has been a momentum over the last two years".

The likes of Gold Investment and Chard are, of course, not big global players and what they do does not push the market price up. They do, however, reflect what is going on in the gold market as the precious metal, which was in the doldrums towards the end of the last decade, has been making a remarkable and sustained recovery.

One person at the heart of the recovery is Dr Graham Birch who heads Merrill Lynch's Gold & General Fund, Britain's only unit fund trust specialising in gold and which overall has $1.3 billion (pounds 803 million) under management.

With regulations forbidding the trust from actually buying gold, Birch invests in mines from South Africa to Russia, South America to Australia and the USA. His fund is listed among the best performers by Standard & Poor's.

Merrill Lynch's investment managers recommend any portfolio to have at least 5% in gold but, until now at least, fund managers have not always taken that advice. Indeed, one reason the ML Gold and General can dominate the market is that other houses simply closed their gold investment desks due to lack of interest.

It is something they may have cause to regret, as interest no longer lacks.

Birch says: "The dominant investors in gold bullion are the central banks, but pension funds have been at a very low level.

Also absent in recent years has been institutional investment, but we have seen signs of change in that in the last 18 months or so.

"We have seen money coming in from more mainstream institutional investors who are using our fund for asset allocation purposes."

The popular notion is, of course, that the gold market is being driven by the imminence of war as it was in the build-up to the Gulf War in Then, for one of only four times since the 1987 stock market crash, gold topped $400 an ounce shortly after Saddam Hussein invaded Kuwait. Today, though there are similarities, the underlying economic climate is different and there are added factors.

O'Connell of the World Gold 1991.

Council says: "The increase in price stems from a whole raft of different things.

"There is concern about economic activity which has alerted professional investors, because they are looking to manage risk because of equity exposure. There is concern about corporate governance, particularly in the United States, because of the obvious scandals such as Enron and WorldCom.

There is concern about stability in the banking sector, in Argentina and particularly Japan, and there are question marks over the destiny of the dollar, the euro and the yen - the two logical safe havens from those currencies are the Swiss franc and gold."

And as investors looking for safe havens moved into gold, so followed the "hot" money, the big, and for the most part New York- based hedge funds, who respond to quarterly trends, looking for quick gains.

Simon Weeks, chairman of the London Bullion Market Association, notes the rise in gold has been steady for at least two years now, kick-started by the Central Bank Gold Agreement in 1999 (incidentally, just when Chancellor Gordon Brown was flogging off more than half of British reserves for what now looks like a knockdown price) and changes in accounting practices in the United States.

In Japan, the government has withdrawn guarantees on cash deposits in the event of bank failures, leading investors to switch to gold, the more tangible asset, as confidence dips. Add in low global interest rates - 0% in the case of Japan - and poor economic forecasts and the situation is ripe for investors.

As Graham Birch of Merrill Lynch puts it: "If you buy a share in a company you can collect a piece of paper, but in order for that piece of paper to be worth something, the company has to earn profits, the management of the company has to pay dividends and so on and if that doesn't happen it just becomes a worthless piece of paper again."

If you have a kilo bar of gold in your drawer, it will make just as many wedding rings in the future as it did in the past."

When war broke out in the Gulf in January 1991, the price of gold dropped steeply overnight as investors banked profits. This time you can expect something similar but analysts predict, with current economic factors in place, the price will remain high for some time to come.

Certainly gold bugs, investors who believe in founding their fortune on the metal and regard paper as something you use to light fires, are to the fore.

Chard says that he one of his clients recently took pounds 200,000 out of his pounds 500,000 pension fund and wished to invest instead in gold sovereigns.

"You would have to say that was a smart move, wouldn't you?"

Copyright 2003
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