Will the gold rush continue in 2009?

Gold bullion beat all other asset classes yet again in 2008, the second year running and the third time since 2005.

All that glistens: Demand for gold is once again on the up

A £1,000 investment in gold bullion on New Year's Eve last year would now be worth more than £1,427, according to new research from BullionVault, a gold dealer.

During the same period, the FTSE 100 index of the UK's top firms has dived by almost one-third of its capitalisation, turning £1,000 into less than £689.

Then there was residential property, which before tax, maintenance and mortgage costs has transformed every £1,000 invested in bricks-and-mortar into £870, according to Nationwide figures.

For their part, cash Isas have added £46 in average interest payments, according to BullionVault, just outstripping retail price inflation of 3.7%.

However, gold's rise over the year has been largely dependent on the pound tumbling in value against the US dollar, the currency gold is priced in. In dollar terms gold rose just 3% in 2008.

Longer term, the gold success story stands up. The Footsie has plummeted by 36% since its record peak of 6930, on New Year's Eve 1999, while putting cash in a tax-free Isa has returned 52.5% over the last nine years.

On the other hand, since the turn of the century, gold has risen by 246% against Sterling, beating even residential property, up by 210% on Nationwide data.

'Since Gordon Brown sold half the nation's gold reserves at rock-bottom 10 years ago this May,' says BullionVault's, Adrian Ash, 'gold bullion has been by far the best-performing asset class for British investors overall.'

With interest rates now crushed down to 1.5% - their lowest level since the Bank of England was founded in 1694, savings' rates are becoming less and less attractive to many and confidence in stock markets has been battered.

One school of thought says that gold looks very attractive in 2009 - if for no other reason that the year looks bad for everything else.

Notably gold rose during the last bout of sharp deflation in the Great Depression of the 1930s when Roosevelt revalued gold by 60% and devalued the dollar by 60%, from $22/oz to $35/oz.

What's the outlook for 2009?

Communications giant Bloomberg conducted a Precious Metals Survey across 20 leading firms, to ascertain the outlook for gold and other metals in 2009. After hitting record highs in summer 2008, gold pulled back in the second half of the year but was at an average of $872 an ounce last year. There is a relatively wide disparity between the forecasts of the many participants and between the bulls and the bears. There are more bulls than bears with only seven of the 20 participants calling for a lower average price in 2009.

Most bearish are the online trading platform Finotec, bullion dealer Kitco and the bullion banks JP Morgan and Barclays. They all forecast an average price of between 6.3% and 11.8% below the average in 2008. The most optimistic estimate is from Dallas Commodity Co., which predicts a mean price of $1,200 per ounce. The average amongst the 20 respondents is $910.

UK and Ireland based, bullion dealer, Gold and Silver Investments, are the fourth most bullish on gold. Mark O'Byrne, of Gold and Silver Investments, says: 'We believe our estimates to be conservative as the average price of gold in 2008 was some $872/oz and thus an average price of some $1,020 is only some 20% above the 2008 average price. Similarly a high of $1,250 is only 21% above the 2008 high.'

O'Byrne points out that many of the bears have been bearish for a number of years and have failed to realise that we are in a bull market for gold. He adds: 'Given the deflationary headwinds assailing us early in 2009, they may be proved right this year as further massive deleveraging could affect the gold price.

'We believe that should the deflationary pressures continue throughout 2009, then most commodities and asset classes will again fall sharply in 2009 but gold will again outperform. As gold did in 2008 when it was up 6% in US dollar terms and by far more in most other currencies. It promises to be a very uncertain and likely volatile year and it will be interesting to see how gold and silver actually perform.'

BullionVault's Ash adds: 'The only certainty about the gold price in 2009 will be volatility. The financial crisis has seen daily swings in the gold price widen five times over for US-Dollar investors. So whatever the longer-term price trend in 2009, anyone making a gold investment should expect gut-wrenching moves on a daily basis. But that doesn't mean the 2009 gold price will cause more sleepless nights than owning stocks, bonds or currencies.'

Gold Supply

Supply is always an issue – it is commonly acknowledged that going into 2009, gold mining supply worldwide has failed to grow during the seven-year bull market in gold – and failed badly. Global gold mining output peaked in 2003. Even the record gold price of 2008 saw world supply fall.

In the third quarter of 2008, the World Gold Council reported that supply was down by 9.7% from the previous year. As such many commentators do not believe the gold price can stay depressed given these fundamentals.

How to invest

Funds

Investing in shares carries greater risk and gold mining shares have fared worse than the gold price. But Meera Patel, of Hargreaves Lansdown, an independent financial adviser, is optimistic for the fortunes of gold.

She says: 'What makes gold investing more attractive is through the shares of gold mining companies. They have been marked down in the market falls and are currently on attractive valuations. We would expect a good bounce from gold shares if they return to their historic average price compared to the gold price.'

A regular recommendation among advisers is the Blackrock Gold & General fund, previously known as Merrill Lynch Gold & General.

The fund which is managed by Graham Birch has been around for more than 20 years. It invests primarily in the shares of gold mining companies. Patel says: 'We believe the fund is well placed to benefit from a re-rating in the gold sector. It also benefits from one of the most experienced teams in the industry. But as with any specialist and high risk investment we believe investors should adopt a long term horizon.'

Purchase funds at This is Money's fund supermarket

Another experienced manager in the sector is Ian Henderson, who manages the JP Morgan Natural Resources fund. The portfolio invests in companies globally engaged in the production and marketing of commodities and currently has some 34% of its assets in gold related investments.

Both the aforementioned funds endured a harsh time in 2008 but over the long term have very strong track records. Over the past decade Blackrock Gold & General is up 635% and JP Morgan Natural Resources fund has achieved growth of 406%.

ETCs/ETFs

Another and popular route is via Exchange Traded Commodities. Exchange Traded Commodities (ETCs) like Exchange Traded Funds, mirror the price of a single or indeed basket of commodities.

Like a tracker fund they are passive investments – they merely echo the direction of a the index or sector they are tracking. Gold ETFs and ETCs are available from the Barclays ETF arm, Ishares, it offers the iShares Comex Gold Trust. ETC specialist ETF Securities has witnessed massive inflows into its gold offerings.

In the week ending January 2 2009, investors bought nearly $35m of physically backed gold ETCs bringing aggregate net inflows to levels 60% above year-ago levels. The group offers both physical gold funds – ETFS Physical Gold or you can track the spot price via Gold Bullion Securities or market funds. It also allows investors to short or leverage their gold investments.

Bullion

The Mint has brought out a brand new UK sovereign issue for less than £50 but experts point out that such a coin, which weighs in at just under two grammes, has perhaps more of a novelty value rather than as a hard investment, simply because they have never been produced before.

Sandra Conway, managing director, of London based dealer ATS Bullion, admits that since the crunch began back in August 2007, business has probably tripled. At times the dealer has been besieged with queues.

She says: 'It has been very busy with huge demand and very limited supply. The majority of people are looking for krugerrands and sovereigns but they have been buying bars too because of the shortage of coins.'

Some dealers believe sovereigns are worth paying a slight extra premium for, because of their more diminutive size and the historic and aesthetic values which act as a valuable bonus.

Sovereigns can benefit investors as they are smaller, more attractive, especially given their historic value, and are arguably better known coins than krugerrands. As such experts tend to believe that it is worth paying a slight extra premium over and above krugerrands notes Lawrence Chard, of Chard, a specialist coin and bullion dealership.

The British Sovereign displays the Queen's head and a horse and dragon and has the advantage of being exempt from Capital Gains Tax in the UK. Other popular options are the Britannia, the Canadian Maple Leaf, the American Eagle or older British coins such as Georgian, Edwardian or Victorian coins.

Expect to pay just under £19,000 for a kilogramme bar of gold. A krugerrand, weighing in at an ounce, costs £633 and a sovereign, which weighs just under eight grammes costs £150.

But remember

Only do business with a reputable dealer. Check on the World Gold Councils – 'Where to buy directory' which can be found on its website at gold.org and the London Bullion Market Association members list which can also be located online at lbma.org.uk. Both list reputable gold dealers. And it is important to remember that you will also have to pay a fee to store gold with your bank or broker.