Is the gold rush finally over?

Gold is metal of the year, easily beating all of its investment rivals.

In the past 12 months, the gold price raced ahead to record impressive growth of 23 per cent. Over five years, it is up a whopping 167 per cent.

Silver ran it a close second, rising nearly 15 per cent over the year, but every other metal went into reverse, including platinum and lead (-9 per cent), aluminium, copper and tin (-16 per cent) and nickel (-24 per cent). So gold takes gold.

Gold can also be declared commodity of the year. The oil price rose a modest 3.4 per cent but almost every other commodity fell, including sugar (-1 per cent), cotton (-5 per cent), platinum (-9 per cent), cocoa (-17 per cent) and natural gas (-44 per cent).

If only stocks and shares had been as good as gold. Over the past 12 months, Far Eastern markets fell - 15 per cent, Europe fell - 17 per cent and the BRICs fell - 25 per cent, according to figures from MSCI Barra. In a dreadful year, gold is one of the few investments to sparkle.

It may look like a gold-plated investment at the moment, but will it shine so brightly in 2012?

In uncertain times, people always turn to gold as a traditional store of value. And right now, times are very uncertain indeed. Shares, bonds, property and commodities are at the mercy of a collapsing eurozone and indebted US. People are losing their faith in paper money as central bankers demean its value by printing more and more of the stuff.

No wonder the price of an ounce of gold has nearly tripled from just over US$500 (Dh1,836) an ounce in 2007 to a peak of $1,900 in August.

There was giddy talk of gold hitting $2,000, $3,000, even $5,000 ... but then the gold price surprised everybody by plunging more than 15 per cent in a matter of days.

It is climbing again and trades at $1,572 at time of writing, but gold no longer looks like a one-way bet. So where does it go next?

The recent dip in the gold price was "a particularly curious phenomenon", says Gaurav Kashyap, head of DGCX desk at online trading brokerage Alpari ME DMCC in Dubai. "Gold is seen as a safe haven so you would expect it to benefit from the worsening problems in Europe, yet the opposite happened."

One reason is that speculative investors have been banking their very substantial profits on gold.

Gold has also faced competition from a rival safe haven in times of trouble, the US dollar. "As investors flee risk, we have seen inflows into the US dollar. This has led to a slide in the gold price," Mr Kashyap says.

Germany's dogged refusal to let the European Central Bank print its way out of the eurozone in a bid to devalue the single currency may also have dented the prospects for gold.

The next question is whether the US Federal Reserve will embark on a fresh bout of monetary stimulus, Mr Kashyap says. "If recent murmurs regarding QE3 materialise, we will enter a period of entrenched dollar weakness. This would probably see the value of gold move past its all-time highs towards $2,000."

With global economic problems set to continue, gold remains a good long-term prospect, but Mr Kashyap wouldn't buy just yet. "I would wait for dips towards $1,560 to $1,600 then look at building some long positions, whether through physical buying, gold futures or gold exchange traded funds."

Gold is a strange sort of safe haven. The last time the gold price spiked was in 1980, following the Soviet invasion of Afghanistan and the Iranian revolution, when it soared to $850 an ounce ($2,200 in today's terms).

Soon after, it felt almost as sharply as it had risen, hurting investors who caught the gold bug too late. The price then flatlined around $250 for more than 20 years.

So don't be misled by that misleading label "safe": gold can be a great way to lose money. "Gold price corrections can be quick and vicious, so make sure you understand the risks you are taking," Mr Kashyap says.

The underlying demand for physical gold remains strong, says Jeremy Batstone-Carr, head of private client research at stockbrokers Charles Stanley. "The gold price is taking a breather after recent turbocharged growth, but the fundamentals remain extremely strong. Central banks and investment institutions are still investing in gold. We are in the peak gold buying season in Asia. I also believe the strength of the US dollar may be transitory, and it is set to come under severe pressure."

Short-term movements are always impossible to guess, in any investment. "But the medium-to-long-term prospect for gold is absolutely fantastic. Investors who are worried about prospects for the global economy, as most investors are, will remain big supporters of this barbarous relic."

Gold isn't a bubble and it isn't about to burst, says James Thomas, regional director at Acuma Wealth Management in Dubai. "There are just too many pressures forcing up the price, led by the eurozone, US debt and the traditional demand for gold jewellery from the India subcontinent. The price of gold may fluctuate, but I'm not expecting a sudden plunge."

So should you be buying gold right now? "Yes, in moderation. Gold makes sense as part of a diversified portfolio, but it would be very risky to invest all your money in gold."

If you don't want to buy gold, you might consider selling it instead. "If you have any physical gold you have owned for years, now may be a good time to realise some profits. If you bought gold a decade ago at, say, $280 an ounce, you could have some very fat profits indeed. The drawback is that it may be difficult to find a better asset to invest your profits in," Mr Thomas says.

Timing the gold market is difficult. Gordon Brown, the former British prime minister, notoriously came unstuck when he sold the UK's gold reserves between 1999 and 2002 at what turned out to be the bottom of the market. He achieved an average sale price of just $275 an ounce. His decision has cost the UK taxpayer more than £10 billion (Dh57.35bn).

So how do you invest in gold? The old-fashioned way is to buy gold bars, which come in different sizes. "You then have the worry of storing them, and finding a buyer when you want to sell," Mr Thomas says.

It is simpler to buy a gold exchange traded fund (ETF), which allows you to trade the gold price without actually buying the metal. You don't have to worry about storage and security, and they are a cheap and liquid way to invest in gold.

Another alternative is to buy shares in a gold mining company such as Newcrest Mining, Fresnillo, Goldcorp, Kinross Gold Corporation and Randgold Resources.

Mining company stocks generally move up and down with the underlying price of gold, but you have the added risk that your chosen miner runs into problems and its share price takes a hit, says Dan Dowding, chief executive officer (Middle East & Asia) at IFAs Killik & Co in Dubai. "To reduce the dangers, you could invest in a mutual fund such as Blackrock Gold & General, which gives you diversified exposure to a portfolio of global gold and precious metals mining shares."

Mr Dowding believes the recent fall in the gold price is merely a "correction" following a strong run, and further money printing in the US and Europe will quickly restore the upwards trend. "Demand from Asia is also likely to continue, with buyers taking advantage of any drop in price. When the gold spot price fell in September, we saw a six-fold surge in demand from China, which is looking to diversify away from its massive exposure to the US dollar."

Right now, the gold price could go either way. "Some analysts believe gold is overvalued following the meteoric rise over the last 10 years, and could fall sharply. Others recognise the global economic outlook remains uncertain, and predict the price could eventually breach $2,000."

Mr Dowding advocates buying gold and gold mining shares on the dips. "Central bank buying, continuing currency devaluation, escalating sovereign debt, political regime change and volatile stock prices will continue to drive the upwards trend. Gold is also very under-owned in investors' portfolios. I would be happy to own a 5 per cent position in gold."

Gold is a unique investment. It has almost no practical or industrial uses, and it doesn't pay any interest. "We take it out of one hole in the ground, the gold mine, and put it back in another hole, the bullion vault of a bank. But it does share one attribute with other asset classes, it attracts its fair share of speculators. If you are going to hold gold, you have to be prepared for a degree of volatility."

Gold has been metal of the year. Whether it claims the gong next year depends on just how bad the crisis gets. The more the global economy is tarnished, the more gold will glister by comparison.

pf@thenational.ae