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.
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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 time.
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.
Today that 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 even keel.
Supply and 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.
June 9, 2010
