The smart money is quietly buying more gold

Five or six years ago, few private investors were very concerned about the price of gold. Then came the financial crisis. When major banks were failing, a sense of apocalypse focused investors’ minds on the value of physical assets as never before.

But other factors were at work. The evolution of new investment vehicles and trading platforms suddenly made it easy for private investors to buy small parcels of real gold. With “physical gold” exchange-traded funds, for instance, investors buy shares quoted on the London Stock Exchange, where each share is backed by solid gold stored in a Docklands bank vault. You could buy and sell gold as easily as you could blue-chip shares.

As the crisis rumbled on, increasing numbers of private investors used these ETFs to speculate, or as part of their planned portfolios, so that from owning about 800 tons of gold in 2007, total ETFs owned almost 3,000 tons by 2012. The gains enjoyed by the investors during that period were terrific, sucking in yet more money, stimulating further appetite, and so on.

Now the gold price is in reverse and ETF investors are selling their holdings fast. There is a sense in which these investors’ actions are self-fulfilling, because although ETFs – big as they are – account for a small proportion of the total, global demand for gold, they play a large part in driving the price.

The World Gold Council (WGC), which collects a range of statistics about the gold market, said ETFs accounted for only 6pc of demand for gold. By far the biggest source of demand is consumer purchase in the form of bars and jewellery, at 72pc of demand.

While ETF purchases and redemptions have a very immediate effect on the gold spot price, this bigger, consumer-driven factor takes longer to feed through. So there is an argument that an ETF sell-off by flighty, equity-style investors will be corrected by the ultimately more resilient demand from people who prefer the old-fashioned hoarding of chains and bars.

The latter demand takes time to feed through, the argument goes, because it is a more complicated supply chain. If you have travelled in an Indian city you might be more susceptible to this view. There the jewellers display updated gold prices in their windows, and sell jewellery by weight from scales ranked along their counters.

And the ETF sell-offs certainly are big. The WGC said in its latest bulletin that ETFs dumped 6pc of their holdings, more than 150 tons, in April alone. That figure has probably grown as the price has continued to slip, by 15pc since the beginning of May. Overall, it is down by more than 30pc from its all-time peak in mid-2011.

There are also some seriously credible professionals currently buying, albeit quietly. One is Sebastian Lyon, the fund manager overseeing Personal Assets Trust, a unique, quoted £600m investment fund whose overriding aim is to preserve shareholders’ capital.

The board of Personal Assets is so hell-bent on its cautious, wealth-preserving tack that it boasts about having missed stock market rallies. In its own words, it is a “tiresome holding for lovers of excitement and adventure, who will find it unbearable to see us sitting on the sidelines while the FTSE climbs tantalisingly to its peak”.

Personal Assets Trust’s excellent performance during the worst of the crisis was largely due to its big investment in bullion – currently more than 12pc of its portfolio. In recent months, as the price has fallen, Mr Lyon has topped up gold holdings. That someone who follows such a cautious mandate, and has done so with such success, is today a buyer of gold is worth noting.