A silver lining

The attractiveness of gold as an investment vehicle in the troubled economic times that we face is not difficult to understand, or that this has been further compounded by political unrest in the Middle East and natural disaster in Japan. It is also unsurprising that rises in the gold price have led to a boom in the assay and refining business: witness the number of high street and postal cash for gold refiners that have appeared seemingly from nowhere. Here, refiners have sought to compensate for the reduced demand and pressured margins within their traditional markets by increasing their supply to the booming investment sector, thus fuelling a seemingly insatiable demand for 'scrap' gold.

Traditional consumers of gold and other precious alloys such as the dental profession have seen their commodity prices soar at exactly the wrong point in the economic cycle. Nobody can be sure how long this boom will go on for, but simple logic indicates that until faith returns to the credit worthiness of sovereign states, gold will continue to be seen as a safe haven for investors. This is compounded by the fact that inflation is relatively high and interest rates are historically low eroding the value of individual savings. This means that the opportunity cost of holding gold is relatively low even though the investment return is solely reliant on its continued increase in value as it lacks the ability to earn. However we should be mindful that some commentators liken the rise in gold prices to that of technology stocks and warn of a potential bust.