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22 April 2024

Gold is a safe bet but it has a habit of making fools of us all

By David Robertson

For those of you nursing big losses from a misjudged and speculative property or share investment, fear not. Although it might feel like it, yours really is not the worst investment decision ever made.

That award goes to two men who lived more than 2,000 years apart. The first was Marcus Crassus, an ambitious Roman aristocrat who wanted to buy his way to power. Crassus was unpopular among the Roman elite as he had a plebeian habit of wanting to make money. He established a unit of fire-fighters who would turn up to a burning building and demand payment to put out the flames. If the owner refused or could not afford the fee, the building burned to the ground and Crassus would step in to offer the owner a knockdown price for the land.

But Crassus had the misfortune of vying for power in Rome at the same time as Pompey and Julius Caesar and he quickly realised that he would need a lot more wealth to overcome his more heroic rivals. So, Crassus cooked up an audacious investment plan that would involve building an army of 10,000 and marching into Mesopotamia to rob the gold-rich Parthians. But Crassus forgot that the fortunes of armies can go down as well as up and his army was slaughtered. Crassus was captured and the Parthians found a suitable punishment for a man so motivated by greed: they poured molten gold down his throat. The other contender for worst investment decision ever is Gordon Brown. The British Prime Minister is currently riding high after his intervention in the banking crisis but back in 1997 Brown made a costly mistake. He decided the 710 tonnes of gold sitting gathering dust in the Bank of England was a waste of space. So, he sold more than 400 tonnes of it at an average price of just $275 an ounce.

The gold price last week was $895 an ounce and last year it hit a record of $1,002 an ounce.

To make matters worse, it appears that the financially irresponsible French decided to take advantage of last year's high prices and sell 113.5 tonnes of their gold reserves. At an average price of $872 an ounce the French raised about $3.5 billion (Dh12bn), which is nearly as much as Gordon Brown made a decade earlier selling four times as much gold.

As Britain prepares to borrow billions of pounds to bail out our struggling economy, the unseemly haste of our leader in selling the gold reserves 12 years ago has been exposed as a dreadful mistake. If only we had the sense of the French and waited until we really needed to sell the family treasure.

Despite the high prices, the French were actually unusual in selling their gold reserves last year. Wobbling banks, crashing financial markets and wildly unpredictable currencies forced both governments and investors to buy gold as an alternative store of wealth.

Sales of gold jewellery in the Middle East, India and China rose 15 per cent, 29 per cent and 10 per cent respectively as families decided that it was safer to wear their wealth than to leave it in the bank or stock market. Governments too were buying gold last year as a hedge against the chaos sweeping the world economy. Russia added 57.7 tonnes worth $1.8bn to its reserves and Brazil bought 19.9 tonnes worth over $600 million.

Individual investors also saw gold as a safe haven for turbulent times. Until recently, the average investor's only option would have been to buy small bars or coins if he or she wanted to store wealth in gold. However, the emergence of exchange-traded funds (ETFs) has been a revelation. ETFs allow investors to buy shares in gold bars, which are then stored in a bank vault. This removes the bothersome need to bury gold bars in the garden or hire your own vault in order to keep the gold safe. ETFs grew their gold volumes by 307 tonnes last year, according to the World Gold Council. In total, they now hold 1,190 tonnes, which is more than Switzerland and the sixth largest reserve in the world. The New York-based SPDR Gold fund holds 795 tonnes and has overtaken Japan as the seventh largest reserve.

With 2009 likely to be as turbulent as last year it is a good bet that the ETFs and governments will continue to buy gold despite the high price. But a note of caution to investors thinking of buying gold: this precious metal has a habit of making fools of us all. Just ask Marcus Crassus or Gordon Brown. My advice would be to avoid the risk. With asset prices falling worldwide, there will be better places to put your wealth in 2009.

- The writer is a business correspondent with The Times of London