From Aztecs, Incas and Mayans to Ian Fleming’s Goldfinger, the commodity that behaves like a currency, gold, has exercised a curious hold over the human imagination – one different in quality from any other investment asset, simple or complex.
In light of the huge amount of assets held in negatively yielding government bonds, wealth managers have had to look for another safe haven and reports suggest that gold is the answer to many asset allocation questions.
However, while gold has certainly been on the ascendancy this year, a quick look through history shows that the shiny yellow substance has had its ups and downs. From 2000, the metal was on a sustained upward trajectory stoked by a weak dollar and further boosted by the fall of Lehman Brothers in 2008.
Gold reached an all-time high in mid-2011 of $1900 an ounce as investors fled from a narrowly averted global depression with stocks and bonds both floundering. However, to the humiliation of gold bugs everywhere, from 2011 to 2013 the commodity lost a third of its value, ending up at $1200 an ounce.
Today’s price of $1530 an ounce clearly shows the renewed appetite for gold, a 28 percent increase on a year-on-year basis. Rathbones David Coombes upped his allocation to the precious metal to 3 percent of his portfolio this month which while some way off Harry Brown’s 25 percent allocation to gold in his famous Permanent Portfolio, does suggest that there is genuine fear of where global markets are heading.
The US-Sino trade war and a US equities extended bull-run which many fear is running out of steam may naturally cause many managers to rethink their risk asset allocations. The aforementioned growth of negatively yielding government bonds, which some report to have around $18 trillion in assets does mean that wealth managers who don’t want to just hold cash have been driven into gold. Is it a good idea?
Gold is seen by many as a natural hedge against inflation and other economic travails but has history shown that to be the case?
When the Federal Reserve was first to fire up the printing presses and begin quantitative easing from 2008 to 2011 this coincided with gold’s magnificent rally. However, it proved to be the dog that didn’t bark as inflation remained low during the period. So a panicked rush into gold was followed by a hefty retreat.
One of the problems with central bank intervention in the economy is that they are an irrational character, not driven by the same push and pull factors as other market participants.
With Fed Chair Jerome Powell’s dramatic U-turn on interest rate policy at the end of last year, monetary policy is staying pretty loose but there are well grounded fears over what happens if there’s a dramatic correction/downturn. Central banks are being left with fewer levers to pull if we head into a recession and that is probably a good reason to consider gold if things go askew.
Holding physical gold is impractical of course, so gold ETFs by the likes of State Street’s SPDR and Van Eck are the easiest ways to access the asset class. Managers may also wish to hold gold mining companies, again available in an ETF format.
Gold tends to do best in a climate of fear. For many asset managers these are uncertain times so some allocation to the precious metal seems wise. But as Shakespeare had it, “All that glisters is not gold” so while gold-backed ETFs may grow in popularity, its little wonder that nation states have been topping up their physical gold reserves as mass redemptions of gold ETFs may prove difficult to fulfil in an albeit extreme situation.
