Gold - still on the up

I am interested in diversifying my portfolio into commodities, and precious metals in particular. I have followed with great interest the soaring price of gold over the past two years and wonder if I have left it too late to invest in gold or gold mining companies. What are the prospects for the price of gold and how can I invest?
A Regular readers may recall a similar question posed in this column some 18 months ago when the price of gold was then trading at a high point of around $380 per ounce which was a seven-year high. The price has since continued to grow and is currently $432 per ounce - approximately 14% up over the 18 months.

Gold can act as a good currency hedge and this has been confirmed as the US dollar has lost value over the period, the price of gold has, as you can see, increased.

While institutions have included gold in their portfolios for decades, it is still deemed relatively uncommon for retail investors to include gold in their portfolio. In my opinion, most reasonably sized portfolios should include commodity exposure of some sort and gold is an obvious one when considering its correlation to the US dollar.

It is very impractical to buy gold directly due to storage and insurance costs, which is why buying an 'entitlement' to gold is more common. This is where gold bars are not actually set aside but instead the purchaser receives a certificate of ownership for the gold bars. This is the more common method of actually owning gold.

Another alternative is to gain exposure through investment funds that invest in gold and other mining companies. In doing so, you would also have exposure to other metals, such as aluminium. Some funds may also invest in oil and gas.

There is a great choice, depending on your specific requirements. These also include capital protected funds.

The short-term picture shows that last week demand for gold soared in Asia with Reuters reporting that premiums for gold bars doubled in Hong Kong on Tuesday. Gold bars were 50 US cents an ounce higher than the London spot price in Hong Kong versus 25 cents last week.

Gold bars were last offered at such a high premium as far back as early 2001. Quotes included that "demand is there but we are running out of supply, which pushes the premiums up". Gold demand was also soaring in India last week.

In conclusion, I see no short-term reason not to include gold in a portfolio but always with a maximum exposure of 5-10%. For most investors, this should be done through established mining and precious metal funds, which are offered overseas.

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 (office hours) or e-mail mh@hollingsworth-int.com

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.