Investment Club: All that glisters may be gold, and price makes it attractive

I mention gold because the Investment Club is now the proud owner of just enough gold dust to cover the surface of a Zurich gnome's filing cabinet and write our name in. But we are not gold bugs, so why is the Club sitting with gold?

Principally, I am worried that David Cameron is pussy-footing around cutting the UK's one trillion debt burden and that is very bad for our investment in gilts. All we hear about is stopping the over sixties bus passes, a saving of only 259 million in England. In practise, outside peak times, the marginal cost of carrying the silver brigade is negligible. Or halt funding for Gatsos, and compromising safety, another trivial saving of 38m.

Conversely, Mervin King, the central bank's governor, is talking about reintroducing quantitative easing (QE), which is spending not saving. This is all tandoori economics. A few appetisers, great anticipation of the main event that then just passes through the system with the odd reminder but no lasting effect.

Not cutting costs but continuing to pump money into an economy that cannot do anything with it, as the drop in bank lending and business investment testifies, seeps into asset inflation, which should benefit gold.

In 1999 the supply of gold at 4,026 tonnes just outstripped demand of 3,455 tonnes. Projecting this into 2010 we have to assume supply has increased as the price has risen. However, demand from India surged by 698 per cent to 193.5 tonnes and even China, which had a restricted local market, increased by 11 per cent to 105.2 tonnes in the first quarter of 2010. China, though, liberalised its local gold market on 3 August, providing a significant pick-up in demand.

Gold's recent dip in price has stimulated jewellery demand in the Middle East and Asia. Therefore, the supply and demand equation is very much in equilibrium and would need very little investment buying to tip the scales in demand's favour, producing higher prices.

In addition, the gold price, to keep pace with inflation, would have to rise from its 1980 high of $850 to at least $2,208. Also, gold rises when the dollar falls. Currently, the Club's paper and pencil analysis (papa) thinks the dollar is going to fall to 1.76 by early November. On this analysis, the Club could reasonably expect gold to rise to about $1,330 a troy ounce from current levels, around $1,200.

So the club this month is going to sit on its small cash pile and await developments. If the price of gold breaks through its 50-day moving average this should instigate a move up to $1,330 before collapsing. If it then falls $300 or so, the club would be a buyer. On the sell side, papa would look for a sell signal in gilts if War stock slides below 77.5.

If it fell through 73.8 this would be negative and the Club would have to start disinvesting gilts in the hope of re-investment in a golden future.