Gold has regained its lustre among wealth managers as its charms have grown amid fears about devalued fiat currencies, but investors must contend with a lack of accurate data and states' interference with the metal’s price, a conference in London has heard.

Once dismissed as the obsession of “gold bug” eccentrics, gold is gaining new respect as an alternative to government-issued paper currencies, due to worries that central bank quantitative easing – creation of new credit – will trigger high inflation, the conference, organised by Cheviot Asset Management, was told.

Central banks and other organisations try to suppress gold as an asset class to protect modern fiat money systems, while some gold-linked instruments, such as exchange-traded funds, may not withstand scrutiny as reliable gold proxies, said Chris Powell, secretary of The Gold Anti-Trust Action Committee, a US-based lobby group.

“Gold is the worst understood market in the world because most of the public information about gold is in fact disinformation,” Powell said.

Cheviot, the UK wealth management firm, hosted the one-day conference to highlight the issue of whether commodity-based currencies could stage a comeback. Gold finally ceased to be linked to the US dollar - the world’s reserve currency - in 1971 under the presidency of Richard Nixon. The link was broken at a time when the US government was wrestling with rising inflation, costs of welfare programmes and the Vietnam war. During the period from around 1700 to 1914, the UK based sterling on what came to be known as the "Gold Standard", briefly leaving it during the 1914-18 world war and rejoining – arguably disastrously – in the mid-1920s. The economist, JM Keynes, dubbed the old Gold Standard a “barbarous relic”.

But the financial disasters of recent years, and the massive bailouts and associated rising debt burdens, have encouraged investors and economists to question the macro-economic ideas of recent times. (To view an article on this issue, click here). Last year, gold prices rose about 25 per cent and it now stands at around $1,337 per ounce. Several wealth management houses, such as Rothschild Private Banking & Trust and Kleinwort Benson, have been enthusiasts about the metal.

Murky waters

The renewed interest in gold has created its dangers, however, because not all of the markets for the metal are transparent or free from official interference as investors may think, Powell said.

Organisations such as the US Federal Reserve, for example, have used instruments such as “gold swaps” to manipulate the price of the yellow metal, while the release of classified official documents in recent years shows government attempts to affect the price, Powell said. He read out a list of published documents, speeches and letters from central bank officials and policymakers which proved, he said, that the gold market is often highly distorted.

Powell also warned that in some markets, such as gold-linked ETFs, there was insufficient clarity on how these instruments were structured or awareness that some banks issuing these products could understate gold demand because such banks were running “short” positions in gold. He added that there is uncertainty on how much physical gold banks have to cover any ETFs that are supposedly tracking the metal.

His comments are yet another reminder that some people in the financial industry are concerned that some exchange-traded products contain hidden risks. In September 2008, trading in some exchange-traded commodity funds tied to American International Group was temporarily halted on the London Stock Exchange, amid concerns about commodity products supported by matching contracts from the debt-laden insurer. AIG had to be bailed out by the US government.

Powell also criticised the London Bullion Market Association, the industry group that also publishes figures on the gold market. Echoing comments Powell has made on his GATA website, he said the high volumes of traded gold that appear in LBMA statistic can be higher than the gold that actually exists.

“The London bullion market is actually a fractional-reserve system built on the idea that most gold buyers will never take delivery of their metal but rather leave it on deposit with the LBMA members from whom they bought it,” Powell added.

WealthBriefing contacted the LBMA about the remarks but the organisation had not responded at the time of going to press.

Speaking at the same event, James Turk, founder and chairman of GoldMoney.com and prominent campaigner for bullion-backed money, stressed that gold’s value in purchasing power terms has remained remarkably steady over the past half century or so, pointing out that gold will buy the same amount of crude oil now as it did about 60 years ago.

“All it [gold] does is what money is supposed to do – preserve its purchasing power,” Turk said.