February 2006 Investment Report
WHEN WILL I ADVISE CLIENTS TO SELL GOLD?
In the last twelve months the price of gold has increased by 26.9% and the Merrill Lynch Gold & General Fund has increased by 67%.
In the last three years the price of gold has increased by 53.5% and the Merrill Lynch Gold & General Fund has increased by 10.5%.
In the last five years the price of gold has increased by 104.4% and the Merrill Lynch Gold & General Fund has increased by 400%.
So why am I continuing to buy gold for clients and not advising them to sell? Certain clients are being advised to sell a portion of their gold holdings to rebalance their investment portfolios and/or to utilise their annual capital gains tax allowances. But I continue to recommend gold as a fundamental part of every client’s portfolio.
When each of my clients invested into gold, I advised them of the previous peaks in the gold price of $875 an ounce in 1980 and in the FT Goldmines Index of 6719.90 on 15th February 1983, suggesting these as guides to the potential of investing in gold. The gold price is currently $553 an ounce and the FT Goldmines Index is currently at 2372.68. Neither the price of gold nor the FT Goldmines Index is near the potential that we established at outset.
In the meantime, the economic and investment fundamentals continue to support my view that the price of gold and gold mining shares should continue to rise, they being:-
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Investors will continue to seek safety away from stock markets and property as they both carry a high level of credit risk (i.e. they are supported by unsustainably high levels of debt);
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Developing economies will continue to diversify their reserve assets away from the US dollar, due to high levels of US trade and current account deficits;
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In 2005 gold production was 2500 tonnes and gold demand was 4000 tonnes;
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It takes many years to open new mines or reopen old mines.
How high will the price of gold and the Merrill Lynch Gold & General Fund Rise?
I have some idea, but it is more important that we sell before the peak in order to preserve
gains. There are several predictions by analysts of the gold price, some of which are
below the previous peak and some are massively in excess of it.
Nevertheless the gold price will not rise for ever and the following are the signs that
I will use in determining when to sell gold :-
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When the level of credit risk is reflected in the price of other assets including the stock market and property;
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When other assets offer good value and economic and credit risk suggest a sustainable recovery in the price of these assets;
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When defensive assets have outperformed growth investments for a period of at least two years. (Growth investments are currently outperforming defensive investments over both two and five years).
The views reflected herein are those of Mitchell Neale Investment Services and should
not be regarded as a recommendation to invest in any product or service; before investing
you should always consider personal investment advice.
Mitchell Neale Investment Services does not accept any liability whatsoever for any
direct or consequential loss arising from any use of this report or its contents. Investors
should be aware that the value and income from investments can rise and fall and that
past performance is not a guide to the future.