In these uncertain
times, strong cases can be made for and against most investments.
Against this backdrop, my thoughts keep coming back to the one investment
that has always acted as a safe haven at moments of crisis. It is
hard to argue against anyone holding at least some gold in their
portfolio as an insurance policy against things going badly wrong.
Gold is hovering
close to its all-time nominal high just above $1,200 an ounce, having
risen around five-fold from a low of $250 an ounce 10 years ago.
That steep rise might give investors pause for thought, especially
when you compare it to the lost decade for equity investors over
the same period, but I think there are several reasons why the yellow
metal could have further to go.
Gold hit its
low point near the top of the dot.com boom. As with most investment
bottoms, it also coincided with a rush to the exit by investors,
including, of course, our own Government, which sold nearly 400
tonnes of gold at an average price of $275 an ounce. It is no coincidence
that gold should have been so out of favour 10 years ago. Famously
described as a "barbarous relic", gold could hardly have
been more different from the hi-tech investments in vogue at the
In a world
in which the government of the day was boasting of its role in eliminating
boom and bust, a reliable store of value through turbulent times
seemed an irrelevance.
complacency looks absurd, and the macro-economic and geo-political
backdrop for gold could hardly be more supportive. From the troubles
afflicting the eurozone to the fight against inflation in emerging
markets; from the real or threatened conflict in Korea, Thailand
and Israel to the biggest environmental disaster since Chernobyl
in the Gulf of Mexico, the watchword for investors today is capital
preservation. Gold’s time has come again.
There is a
string of other reasons to expect the price of bullion to continue
rising. Credit Suisse argues that gold has tended to outperform
when the real, inflation-adjusted Fed Funds rate has been below
2pc, as it is now. With the principal short-term danger in the US
and Europe continuing to be deflation, rates should stay low for
an extended period, I believe.
In the 20 years
following the 1930s financial crisis and Depression, base rates
in the UK did not rise above 2pc. The OECD’s call for them to rise
in Britain to 3.5pc by the end of next year looks wide of the mark
to me. Over in the US, the output gap is a yawning 5pc, bank credit
is hard to come by and fiscal tightening is starting to kick in.
Loose monetary policy will be necessary to keep the economy on an
demand is also supportive of the gold price. Over the past 10 years
or so, exchange traded funds have amassed nearly 2,000 tonnes of
gold as investors have looked for comfort in a world in which the
value of most of their other assets is at risk of being inflated
away. Despite this inflow, these funds still represent less than
1pc of total assets under management.