'There is a danger that people are buying gold now when prices are overheated'

Investors who think gold can only go up should remember that many thought the same about tech stocks in 1999, one expert
'There is a danger that people are buying gold now when prices are overheated'
Following a spectacular 10-year bull run, some say buying gold has become too risky for private investors.
Patrick Connolly, of the financial adviser AWD Chase de Vere, said: "There continue to be bullish statements and bold predictions about gold and the assumption that the returns seen over the past decade are now the norm. There were similar sentiments in 1999 about technology stocks, and the belief that the only way was up."

As he pointed out, there is a real danger that this could be a "gold bubble", and when prices do fall – which they will at some point – the correction could be far sharper and last longer than many people expect. He added: "It's easy to forget that gold prices can go through prolonged downturns. During the Eighties and Nineties, the price of gold fell by 70pc."

Although gold is a good inflation hedge over the long term, this isn't always the case over shorter, more realistic time frames over which the typical investor is more likely to hold the asset. If you bought gold in the Eighties, for example, it hasn't proved to be the most effective hedge against inflation since then. If it had kept pace with prices, it would now be worth about $2,600 an ounce.

Martin Bamford, a chartered financial planner with Informed Choice, said: "Investors are understandably concerned about inflation at present. But there is a real risk that those now buying gold are doing so at the top of the market and will end up making losses when prices fall."

He added that investors should remember that gold does not produce any income, in terms of either interest or dividends, so returns are based solely on capital growth. He said: "It can also be difficult to access as an asset class: many people end up buying funds that are largely invested in mining stocks, which don't always reflect gold prices accurately."
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Other options include buying gold bullion or coins, or investing in an exchange-traded fund (ETF), which basically follows the price of gold.

Mr Bamford said: "I'd be wary about getting into gold at present. The price may still rise further, but the gains are unlikely to be so significant. When prices fall, it is those who got in near the end who will suffer the biggest losses."

He added that there were also investment costs to consider, such as the cost of storing, trading and insuring bullion, or dealing charges on ETFs. "A diversified investment portfolio, containing shares, property and bonds, may be a better way to protect against inflation," Mr Bamford said.

"And about a third of the stocks in the FTSE 100 are commodity-related stocks, whose performance will be correlated to gold prices. There is a danger that people are buying now when prices are overheated and becoming overexposed to one asset class."

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