Should you join the Germans by going for gold?

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Money news, advice and predictions for savers and spenders. This week: Gold - how to make money without losing your fortune.

By Jeremy Gates

Any savers and small investors unsettled by this week's disagreement between the Governor of the Bank of England and the Chancellor of the Exchequer might be consulting their budget-airline timetables.

It was confirmed this week that Germany will introduce gold vending-machines as a new method of storing wealth.

While gloomy Britons contemplate poor returns on cash and shares, shoppers at Frankfurt Airport can buy a one-gram wafer of gold for £25, or a 10g bar for £245 - with gold coins also available if required.

"German investors have always preferred to hold a lot of personal wealth in gold, for historical reasons. They have twice lost everything," the owner of the firm installing 500 'Gold to Go' machines in German-speaking countries this year told the Financial Times.

But with gold prices from machines about 30% higher than market prices for the cheapest product, even Germans - who bought 108 tonnes of gold in 2008, up from 36 tonnes in 2007 - might have doubts about this new scheme.

Could it work here too?

Colin Jackson, financial advisor at Ilford, Essex-based Baronworth Securities, says, with tongue firmly in cheek: "My clients are mainly elderly. I worry about the security of them taking gold wafers from machines in Gants Hill."

Few dispute, however, that gold has been a strong performer in recent financial earthquakes.

Adrian Ash, head of research at BullionVault, a leading online service for gold bullion investment with 14,000 private investors worldwide, says somebody selling a home at the average price in Britain in 2004 could have bought 695 ounces of gold (at £220 per ounce) with the cash.

Today, with gold up to £603 an ounce, they could buy the average-price home back for 253 ounces. Or they could sell all the gold to buy 2.7 average-price houses.

In the intervening period, of course, they would have needed to stay with friends or family. Even 695 ounces of gold doesn't put a roof over your head.

"Real interest rates in the UK have averaged just 1.8% so far this decade - barely two-fifths the real return on cash in the 1980s and 1990s," Ash explains.

"The gold price in sterling, in contrast, has risen four-fold and more, as money's competitive edge as a store of wealth has been steadily eroded. Physical gold ownership looks attractive to individuals worried about the future of savings.

"Gold's appeal is only likely to grow until real returns paid to cash turn sharply higher."

Financial advisor Hargreaves Lansdown (HL) leaves share tips off the front page of its latest newsletter to small clients, and makes a case for gold instead.

"Given the current economic environment, it is time to revisit the merits or otherwise of the 'yellow metal'," says HL's Richard Hunter.

"It has proved a remarkably resilient store of value over hundreds of years, and in addition is an asset where investors seek protection when they need it most."

He notes the net inflow of funds into all types of gold investment soared 80% to a record £18 billion in 2008, despite falling demand for gold jewellery in India and the Middle East.

Many of HL's small investors use the BlackRock Gold & General fund to gain exposure to gold markets. It holds shares in 40-70 companies, most of them gold producers.

"It is realistic to have 5% of your long-term savings in this fund," says HL's Mark Dampier. "Gold may be a fickle animal, but given serious geopolitical and economic problems, there is reason to see gold prices going significantly higher from here."

As HL's newsletter explains, there are various way for individuals to hold gold: Exchange Traded Funds, jewellery, coins (sovereigns or krugerrands) and bars, or derivatives which track gold prices among them.

Mining shares are another option. Hunter reckons a 5% rise in gold prices triggers a 10-15% hike in share prices, though this effect works equally strongly in the opposite direction.

At discount broker Killik & Co, analyst Mike Gilligan says: "Investor scepticism about the rationale for gold investment is valid, given that it is a non-income-producing asset hard to value from a fundamental perspective.

"However, the macroeconomic case for higher gold prices remains intact. The recent spike in gold prices on the back of plans for US quantitative easing serves to reinforce our view that gold will serve as an insurance policy against inflationary pressures and/or economic dislocation."

Gilligan thinks gold demand could soar if Japan and China eventually reduce their vast dollar surpluses.

Frank Cochran, at Wolverhampton-based financial advisor FSC Investment Services, notes that BlackRock Gold and General has performed "out of its skin".

"Available data suggests gold prices going higher from here," he says. "In a high-risk portfolio, we might have 25% in this fund. Lower-risk investors prefer 5-10%. The fund is a long-term hold, for capital growth rather than income."

Ash at BullionVault believes German gold machines are unlikely to come to the UK.

"The idea of gold ownership for small investors is spreading," he says. "We had it 30 or 40 years ago, but the bear market of the 1980s put the kibosh on it, banks lost interest and the gold market was left sleeping."

Today's financial scenario is different: the tougher it gets, the more attractive gold becomes to shell-shocked investors.

There is no minimum investment at BullionVault. Some clients, depositing a small sum to buy gold each month, deal as little as one gram at a time, currently worth about £18.50.

Dealing only in approved London Bullion Market Association gold, BullionVault clients have an average holding worth £30,000 per head, with Zurich the preferred place of storage because Switzerland is seen as a strong centre of personal property rights and political neutrality.

The downside is that gold's price remains highly volatile: since February, for example, the price has dropped from £700 to £576 per ounce, a fall of 18%.

If Chancellor Alistair Darling has it right, the 'green shoots' of recovery might return us to a financial world we know and understand.

If it doesn't, the attractions of gold are likely to increase, even if few of us are ready to buy at a vending-machine.

:: Information: Hargreaves Lansdown (0117 900 900 and www.H-L.co.uk); BullionVault (020 86000 130 and www.bullionvault.com); FSC Investment Services (01902 422333).

Discount broker Killik & Co (020 7337 0520 and www.killik.com) has BlackRock Gold & General fund on its 'buy' list.

Poundnotes

:: Finding a job isn't the only worry for students graduating this summer. Online credit report provider Callcredit Check reckons it will take 12 years to pay off the average student loan (£15,700) on the average graduate salary (£22,300), based on a survey of over 2,000 students.

The survey suggests that 44% of people aged 18-24 don't save anything at all, and 64% are more concerned about their financial situation today than in April 2008.

:: ClearStart, which provides solutions to debt problems rather than making consumers live with them, is braced for a surge in the number of people seeking free advice following Citizens Advice Bureau figures showing a 49% rise in problems relating to mortgage and secured loan arrears and a 24% jump in bankruptcy enquiries.

"It is important to get fee-free advice as early as possible to resolve debt, rather than just living with it," says ClearStart chief executive Chris Moat.

"If advice isn't sought quickly, debts can spiral out of control very quickly. Early advice can be the difference between keeping a roof over your head and losing your home."

ClearStart telephone helpline: 0800 954 6327.

:: Although MPs have taken the expenses game to impressive heights, a survey from price-comparison service uSwitch.com says 2.7 million UK workers make half-a-billion pounds each year by 'tweaking' expenses.

Around 16% of employees admit to being creative with the truth, making £200 million extra a year by exaggerating claims. Some 2.8 million employees inflate car mileage, and over 830,000 ask taxi drivers for blank receipts to support bogus claims.

About 4.6 million workers use their work mobile for personal calls, and 2.7 million rack up employers' phone bills to contact family and friends.

"It seems it is not just MPs who are running the risk of being caught with their hands in the cookie jar," says uSwitch personal finance expert Louise Bond.

"While the current climate is tougher than ever for employees facing pay cuts and freezes, it is perhaps understandable, it not at all condonable, if they do succumb to the temptation of being economical with the truth when it comes to expenses claims."

Hear! Hear! Give the lady a peerage.

:: Nationwide BS is offering a Guaranteed Savings Bond, paying 4% gross fixed rate over one year, to savers who simultaneously open a Legal & General Six Year Multi-Index Guaranteed Equity Bond (GEB), with potential for stock market-linked growth of up to 50% of the original investment at the end of six years.

If maximum potential growth is achieved, this is equivalent to 6.99% AER.

Minimum investment is £3,000 in each product, and at least half the original investment must be placed in the Legal & General GEB.

Applications can be made until August 8, with the plan starting on August 12. GEBs can be held in an ISA wrapper, to protect gains from the taxman.

:: High five savers:

Phone No Rate Account Period Deposit Interest paid

Ruffer Bank 01372 736700 4.52% Fixed Rate Bond Five Years (P) £10,000 Quarterly

AA 0845 603 2295 4.50% (F) Telephone Fixed Rate Bond Five Years (T) £500 Yly

ICICI Bank UK www.icicibank.co.uk 4.40% (F) HiSAVE Fixed Rate Five Years £1,000 OM

Halifax www.halifax.co.uk 4.40% (F) Web Saver Five Years £500 Yly

United Nat Bank 0800 218 2266 3.50% Three Month Gold Deposit Three Months £1 Half-yearly

:: Top-five borrowers

Phone No Rate Period Max% Adv Fee Incentive

HSBC 0800 494999 2.49% discounted for two years 60% £249 Yes

First Direct 0845 610 0100 2.89% variable for term 75% £799 Yes

HSBC 0800 494 999 2.95% variable for term 75% £799 Yes

Co-Op Bank 0800 633 5286 3.24% to 31/09/12 75% £ 995 Yes

Marsden BS 000 801645 3.29% for term 75% £1098 Yes

Code:

*F - Fixed

*P - Operated by Post

*B - Operated by Post/Telephone

*T - Operated by Telephone

*W - Operated by Internet

*H - Operated by Internet/Telephone

*S - Available only to those aged 50 or over

*R - Available to those aged 60 and over.

:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice).