Wednesday, 23 November 2011

I'm buying the fund not the ETF today but will gold plunge anyway?

MoneyWeek's John C Burford said in an email today : "my target is for gold to fall to much lower levels".

His last gold forecast proved pretty accurate but I didn't act on it because I didn't understand his methods.

I still don't. However I am at a buying moment - it's two months since my first investment on 22 September - and I've decided on a vague month-by-month investment strategy.

So I am looking to add more to my gold bet, either via investing in ETFS Physical Gold (PHAU) or BlackRock Gold and General and I had a look at this choice yesterday.

Back to Burford... just because he was right last time I thought I'd hang on and see if he's right again. I can't tell from the piece what sort of time scale he's putting on this - his 'tramlines' suggest the fall will be today (Thursday).

I've just put in a £250 order for more BlackRock Gold and General (it's been accepted although I didn't think I could invest such small amounts. If it goes through I might do the same over the next three days. But I want to check with my broker Hargreaves Lansdown what they mean by this: "We actively monitor levels of trading and may refuse applications from anyone who is considered to have a history of short-term or excessive trading or whose trading has been, or may be, disruptive" in their terms and conditions).

I also need to properly understand how the spreads on this unit trust work. Yesterday the buying price was nearly 6% higher than the selling price although most of this should be wiped-off because I'm dealing through Hargreaves Lansdown.

As far as I can tell, I am able to cancel my order by phone any time before the investment manager starts processing the order - and no one knows when that is.

In his piece Burford says that if gold falls with markets "This demonstrates the fact that gold may not be, contrary to common wisdom, a hedge against financial turmoil. If and when the Dow makes a huge leap down, gold is likely to follow."

That does seem to be the way things work at the moment due to investors selling gold and buying dollars. But gold falls less and recovers faster and that's enough for me - and it seems like a good idea to buy at those low points.

I also noticed that my pounds have weakened against the dollar - hence the sterling gold ETF PHGP, has not fallen as far as PHAU. To me this looks counter-intuitive but I think it makes sense: if I convert my dollar denominated ETF into pounds I get more pounds per dollar (because the pound has weakened) so, in sterling terms my gold price hasn't fallen so far. This means that a sterling based investor is at a disadvantage during a good buying opportunity.

I want the pound to be weak when I sell, not when I buy. But this stuff still doesn't come naturally to me!

As far as I can tell this currency problem is by-passed, or passed on to fund manager, by investing in the BlackRock Gold and General. Hopefully a fund manager knows how to deal with that catch 22.

At the same time I can also invest smaller amounts at no cost. So I'm going to give it a go.