Gold regains safe-haven lustre

Investors are flocking to gold amid increasing uncertainty on the continent, fears over inflation and frozen interest rates, and volatility in the stockmarkets.

They have piled into the yellow metal in different ways. BullionVault, the largest online physical gold and silver market, has reported a 48% rise in pre-tax profits over the past year. In the year to 31 October, investors traded more than £1.57 billion of physical gold and silver, a massive jump from the previous year when only £685 million was traded.

In fact, according to BullionVault, gold bugs using its online market have now amassed more gold bullion bars than the official reserves of Hong Kong, Luxembourg, Canada, Ireland and Qatar added together. Paul Tustain, founder of BullionVault, says the major driver of growth has been the steady realisation among private savers that low interest rates are here to stay. That's despite the fact that gold does not provide a yield.

Investors have also been gaining access to gold through exchange traded funds (ETFs). ETF Securities recorded a net inflow of $339 million (£214 million) into its physical gold ETFs listed in Europe in the five weeks to 14 November. This contrasts with a net outflow from its gold ETFs listed in the US and Australia, highlighting that it's European investors in particular who have been seeking solace in gold as the turmoil swirls around the continent.

Martin Arnold, senior analyst at ETF Securities, says the biggest inflow into the firm's gold ETFs this year was in mid-July/early August when a huge $937 million rushed in. "There was substantial concern at this time around the Greek crisis," he notes.

Despite the rush of money easing off, Arnold predicts that gold ETFs will remain popular. "Over the last three weeks inflows have been high as investors are aware that more needs to be done [to deal with the eurozone crisis]. The lack of political cohesion and weak numbers coming out of the economy are keeping investors wary of riskier assets like equity markets. Given that background we expect flows into precious metals to remain high."

Investors have also been seeking the safe haven of gold by buying shares in gold companies and miners, or investing in funds that do.

The £3 billion BlackRock Gold & General fund has surged in popularity recently. On Interactive Investor, it was the most-bought fund in October. It has also been popular among The Share Centre's customers.

So what next for gold? At the time of writing the gold price was hovering at $1,775 an ounce, a fair way off the heady highs of early September when it topped $1,900.

But, the general mood is that gold will climb again. At a recent Schroders conference, 40% of financial intermediaries said that the gold price would reach $2,000 in the next two years.

However, Adrian Ash, head of research at BullionVault, cautions against investors jumping on the $2,000 bandwagon and those that see the metal as an easy safe haven. "Chinese consumers, along with the government, have been big buyers of gold [which helps push the price up]. So there is a big risk to the gold price as a lot is riding on Chinese support," he comments.

Indeed gold was not immune from the late summer dash for cash when the price fell 11% in September alone. Ash adds that a lot of this "hot money" has left the gold market since the summer, which led to that plummet in the price, and that the large bankruptcy of US broker MF Global means there's a lot of credit "that suddenly isn't there anymore".

He also points out that there are plenty of call options on the gold price hitting $2,000 in December. "In my experience, when there's a lot of anticipation like this it normally doesn't materialise."

Looking for more on investing in gold miners? See what the iBall TV team has to say in the episode featuring Greatland Gold.