Page last updated at 14:00 GMT, Thursday, 12 June 2008 15:00 UK

Gold fever

By Debbie Fabb
BBC Money Programme

Liquid gold
Gold is completely indestructible

The value of gold has been going through the roof. Its price has quadrupled since 1999, and in March this year it reached $1,000 an ounce for the first time.

With uncertainty in the markets and turmoil in the banks, more and more people are turning to gold.

"Since the financial crisis erupted last August, there's been a flood of investment into gold, really because of its safe haven properties," says Jill Leyland, economic advisor to the World Gold Council.

"Gold is no one's liability and that means it is the ultimate defence against unforeseen contingencies."

Mainly jewellery

Sandra Conway, managing director of ATS Bullion, in London has seen sales of gold coins and bullion double in the last year and thinks she knows the reason.

Gold jewellery in Saudi Arabia
Gold equals jewellery for most people

"People were very worried when they saw the Northern Rock situation," she says.

"And I think people are starting to realise that when the bank has your money, they might not actually physically have it if there's a problem."

While more people are buying gold for its investments properties, for most people, buying gold still means buying jewellery.

Three quarters of all gold ends up being made into jewellery.

Dubai has the largest concentration of jewellery shops in the world. Last year, it traded more than $14bn (£7bn) worth of gold.

Scarce commodity

Despite recent price rises, business is booming.

Gold bars
They're not finding it as easy as they used to
Miner Pierre Lassonde

"Buying gold is an important part of the culture and lifestyle," says Tawhid Adbullah, managing director of jewellery group Damas.

"Gold in general is beautiful, it's a unique metal.

"It's proven to be one of the best things that you ever buy - it lasts for years."

Even though demand is increasing, Gold production has actually been falling now since 2001.

Miners simply cannot keep up with the world's increasing demand for gold.

The reason is simple, according to miner Pierre Lassonde.

"They're not finding it as easy as they used to," he says.

Selling it cheap

Gold price

Rising energy costs have also made gold a very expensive commodity to mine.

Lassonde explains that a $1,000 bill costs a few cents to print. But gold, costs approximately $600 an ounce to mine and refine.

Gold is not just for the wealthy - most central banks around the world hold gold as part of their reserves.

The Bank of England has stored some for over 300 years.

But in 1999, the then chancellor, Gordon Brown, told the Bank of England to sell of some of the UK's gold.

Over the next few years, it auctioned off 395 tonnes - more than half the country's gold reserves.

However, both the timing and the manner of the gold sales turned out to be controversial.

Gold had been falling in price, but after Brown's announcement it fell to its lowest for 20 years.

"To suddenly announce that you are going to sell a significant amount of it at auctions, when the market was in a pretty fragile state, was to totally destroy, or potentially to destroy, the gold price," says Tim Green, author of The ages of gold.

Good investment?

Most financial advisors say it makes sense to diversity a portfolio, especially when there are limited ways of making money on the gold stored.

Gold mine
If they're left holding too much when the price goes down again, at least they can wear it to the next party


Philip Shaw, chief economist at Investec, analysed the chancellor's decision for the Money Programme. He says

"The 17 gold auctions netted the exchequer around $3.5bn," he says. "Now the proceeds were well invested in government bonds, the value approximately doubled to around $7bn."

But as we now know, gold turned out to be an even better investment. Its price quadrupled.

"Had Gordon Brown decided not to sell the gold and sold at the peak earlier this year the exchequer would be better off to the tune of around t£3bn," says Mr Shaw.

In response, the Treasury says its gold sales programme "was part of a restructuring of the foreign currency and gold reserves, aimed at achieving a better-balanced portfolio".

"A reduction in risk of approximately 30% was achieved," it says.

"The National Audit Office, in a report in 2002, concluded that the Treasury had met its objectives selling in a 'transparent and fair manner while achieving value of money'. It added that 'other central banks around the world have adopted similar policies'."

The current economic and political climate will continue to shape the future price of gold.

But as is the case with all commodities, its price can fluctuate. '

Following its high in March, gold prices have dropped 15%.

But unlike most other commodities, gold is completely indestructible. All the gold ever mined in the world still exists today - some 161,000 tonnes of it.

The only thing we know for sure is that gold is here to stay.

Gold price

The Money Programme - gold fever, BBC 2 at 19.00 - 19.30, Friday 13 June 2008.


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