Jeff Salway: Now is not the time to rush from gold

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IF THE gold price plunge this week sparked relatively little panic among ordinary investors, it’s because few people realise they’re exposed to it.

That’s probably a good thing, given that panic generally inspires people to make rash and costly decisions.

The 10 per cent plunge in gold prices on Monday caught markets by surprise, with little obvious explanation beyond some heavy “short selling” last Friday by speculative investors. The Cyprus crisis and Japan’s planned quantitative easing (QE) programme are likely to have contributed, too.

And you don’t need to own physical gold to have been affected by the dramatic price decline this week. The chances are that if you’ve got money in equity funds, perhaps through your pension savings, the value of your savings may well have been taken a hit.

Some of the UK’s biggest retail funds invest heavily in gold and mining stocks, not least the £1.2 billion JPM Natural Resources and the £2.9bn BlackRock Gold and General funds. Many global growth and emerging markets funds have suffered, too.

But there’s good news as well. The first is that most such funds have only a small amount of holdings in gold and have made gains from the asset in recent years that this week’s events haven’t come close to wiping out.

The second is that gold should only be a small part of a diversified portfolio, aiding that diversification and providing a valuable hedge against inflation. This should act as a timely reminder of that rule.

Few funds or investors are daft enough to hold the vast bulk of their money in gold, unlike hedge fund guru John Paulson. Earlier this week, he was sitting on year-to-date losses around $1.52bn (£1bn), according to Bloomberg, a result of holding an estimated 85 per cent of the $9.95 billion he invests through his hedge funds in gold share classes.

So what next? If you’re now wondering about the potential impact of the gold price plunge on your investments, there’s one message – don’t panic. The decline was the biggest since the 1980s, but the correction was overdue, given the sharp price spike of 2011. No asset comes with protection against price volatility, even if QE has driven massive demand for currency and inflation hedges.

That it provides some long-term protection against inflat-ion remains the strongest and most relevant argument in favour of some exposure to gold. The price may well fall further and it’s tumbling from a great height but, as with any investment, there’s no way of knowing exactly what’ll happen next.

It’s probably not the time to bail out of gold, but neither is it time to pile in – and it never will be.

To the House of Lords, where incoherent government policy-making suffered another defeat at the hands of common sense.

That’s not an attribute you’d always associate with the House of Lords, but it’s the peers that we have to thank for blocking George Osborne’s plan for company employees to get free shares in exchange for their rights.

Like the new Home to Buy scheme – which by supporting house prices will have the effect of squeezing out those it is supposed to help – the shares for rights proposal is muddled at best. It’s a solution to a problem that doesn’t exist.

To recap briefly, Osborne’s plan would see workers being able to claim between £2,000 and £5,000 of capital gains tax-exempt shares in their employer in return for relinquishing valuable employment rights.

The Lords rej­ected the proposal by a significant majority, sending it back to the Commons. However, it returns to the House of Lords on Monday after MPs voted to reinstate the clause, despite vocal oppos-ition from MPs, business groups and trade unions.

Neither employees nor employers are interested, and both sides have made their opposition to the proposal very clear. Take-up of the scheme will be so low as to be virtually non-existent.

So why is Osborne pushing ahead with it in the face of such resistance? Put it this way, it’s nothing to do with boosting share ownership. Associating that with the loss of rights would tarnish the very concept entirely. Osborne has no interest in encouraging people to save; that much has been made clear over the past three years.

His aims are more sinister, with the dire economy a convenient smoke screen to justify the erosion of employment rights. The rights that employees would give up in return for shares include those around flexible working, maternity leave and pay, redundancy and unfair dismissal. Still wondering what the government’s objective is here?

The Lords will surely vote against it once more on Monday, for which we should be grateful.