Russell Luckock, chairman of Birmingham-based pressworks company AE Harris, looks at how investors are turning to gold as a way of hedging against the worst of the credit crunch.
In the United Kingdom, as in many other parts of the world, the credit squeeze is beginning to take its hold.
Companies and families are having to take stock of their fortunes or level of debt, with a view to making ends meet.
Bank managers have become much less friendly, and mutter menacingly about substantial reduction of overdraft “with immediate effect”.
A period of cheap money has come to an end. Borrowing is becoming much more expensive, as inflation, in real terms, is ratcheted up to some 10 per cent. Governments worldwide try to persuade their electorates that prices are only increasing by some three to four per cent.
That is the way with politicians, but for the rest of us living in the real world, we see the facts as they really are.
The present state of affairs has led me to take a look at the world of gold, the traditional hedge for investors in time of trouble. The trick is to buy gold when it is cheap, and draw on this investment in times of real need.
Former Chancellor of the Exchequer, now Prime Minister, Gordon Brown, demonstrated how to get it wrong, when in 1999, completely against all professional advice, he unloaded half of the UK’s stock of the commodity, some 350 tonnes at a price of £256-£296 per troy ounce.
Today, what’s left in the vaults is valued at round about £450 per troy ounce, a somewhat embarrassing difference, which has cost the British taxpayer about £2.1 billion according to leading accountants Grant Thornton. This is not a recommended way to become a Prime Minister.
There is no interest to accrue from having gold bars hidden under the bed; you have to buy and sell at the right time.
In point of fact the spread between buying and selling the material is only about one per cent, so very little cost is involved there. Just add on the insurance, and it is very easy to quantify the actual cost of investment.The gold market is very active, not only in the daily trading on the metal market, but also in so far as scrap jewellery is concerned.
I went to see Michael Pitts of Birmingham-based gold processors Plus-Gold, which is enjoying a very active period of trade as members of the public hand into their trade customers, the high street jewellers, old rings, chains, pendants, ear-rings, cuff-links etc.
These are in various grades of material, which all have to be sorted and tested, and are being traded in for hard cash.
Gold content is measured in carats, 24 carat being 99.999 per cent pure. Most ornamental work is produced in grades varying from nine to 22, the balance of the content being made up with silver, copper and other alloys.
Red gold has a higher copper percentage, but is rarely melted down, as generally the antique value is worth more than the base material.
I was amazed to see in Plus-Gold’s warehouse, plastic buckets containing a wide variety of adornments, some of which had been lying around for a long time and indicated by both hall marks and general design. Some of the older pieces were very chunky, and worth quite a bit. Michael Pitts told me that he is constantly amazed at the variety, and type of adornment traded in.
On occasions, even false teeth come over the counter. All these pieces are then sorted, the diamonds and other gemstones being removed.
These are sold on to specialist traders who will recycle the stones to manufacturers in the trade.
The gold is melted down into blocks to be sent to the refiners who will process the material.
My next port of call was to the factory and offices of Metalor, a company which came into existence in Switzerland in 1852, and is operating in some 15 countries worldwide.
There, managing director Paul Stewart and Paul Canning, from the sales department, explained how bars of raw material were received from companies like Plus-Gold, and analysed as to content.
They will melt down said bars, removing all impurities and other metals, leaving 24 carat material which is then processed into bars for sale, or made into strip rod or wire in various grades to begin the cycle again in either their own workshops, or sold on to other manufacturers.
This company will handle any size of order. By way of illustration, I was shown some gold in its raw state which was about to be delivered to a specialist designer. The price of this piece was about $9,000.
The end product, a one-off specially designed piece of artistry, would be worth two or three times that value. One interesting statistic was that gold when melted down does not lose any weight in burn off, unlike other non-ferrous materials.
Paul Stewart confirmed to me that business was very brisk in the recycling part of the operation.
The current high price of this metal is resulting in a substantial weight being processed.
It was fascinating to be taken into this company’s vaults, to see the materials made to order awaiting delivery or collection in their raw state, the value of which was astronomical.
For the investor, hall-marked gold bars are the very best form of investment, for added value does not have to be taken into account.
It will never deteriorate, but will have to be stored in a safe place. Under the bed is not recommended.
Investors are experiencing difficult times. China and India are consuming vast quantities of all commodities, which financial experts had not fully quantified.
The world’s stock markets are reacting to forces of which they have little experience. Hence the high price of gold, an investment fully understood.