Gold's Value as a Safe Haven and Source of Returns
Gold Outperforms Other Assets During Lockdowns and as Recessions Loom.
Gold is one of the top performing assets in 2020 year to date. As the pandemic and lockdown of entire economies tip debt laden economies into financial and economic crises and stock markets fall sharply, gold has risen 16.5% in dollar terms, 21% in euro terms, 25% in pounds and by more in other other currencies.
Major stock market indices have fallen very sharply with the EuroStoxx 50, the European benchmark index, down over 22% and the MSCI World Index down 13% (returns as of 18/05/20).
The only asset class to have outperformed gold is U.S. debt- and this outperformance does not look set to continue. U.S. bonds are near record highs and record low yields. They may struggle due to the poor outlook for the U.S. economy, the U.S. fiscal position and the growing risks to the dollar from a very dysfunctional and uncertain political and economic landscape.
Most European bonds have fallen in value and German bunds are marginally higher.
Property markets gone into stasis or have fallen due to a lack of transactions. KBC estimates that Irish house prices could fall 12% to 20% in 2020 alone.
Many property funds have suspended redemptions showing the very significant liquidity risk in property funds. Most analysts are concerned that we are likely to see both residential and commercial property fall in value the coming months due to falling incomes, leading to less first time and other buyers and falling rents impacting buy to let investment. Bank shares have fallen too, due to concerns about the outlook for banks, their loan books and the financial system.
WHAT ARE THE FUNDAMENTALS OF THE GOLD MARKET IN TERMS OF SUPPLY AND DEMAND?
There has been a surge in demand for gold by investors globally. Brokers, refineries and government mints were already struggling to fulfil this demand prior to the government lockdowns which forced most major gold refineries, mints and even mines to shut down.
The physical gold market is relatively small when compared to stock, bond and indeed currency markets. All of the refined, investment grade (0.999 pure) gold in the world is 22 metres cubed and would fit on the centre court of Wimbledon. All it takes is a small amount of extra investment demand to push prices higher. Today there are very few sellers and a level of safe haven investment demand not seen since the financial crisis.
WHAT IS THE DIFFERENCE BETWEEN PAPER AND ELECTRONIC GOLD AND PHYSICAL GOLD?
It is important to understand the difference between real physical gold and synthetic forms of gold in the form of various gold products and vehicles to get price exposure including crypto gold, digital gold via gold bullion trading platforms, gold exchange traded funds (ETFs), gold futures and gold CFDs.
If you are bullish on the price of gold and fancy a short term punt on gold, these are good ways to get exposure to the price. All are forms of digital gold, whereby you are trading gold in a digital manner and have the cyber, counter party and systemic risk that goes with this.
What is gold bullion? Well bullion is simply a precious metal - gold, silver or platinum - in pure investment grade format which means it normally 99.99% pure.
The safest way to invest in gold, either as a lump sum investment or in a pension, is to own physical gold in the form of gold bullion coins and bars where the investor has outright legal ownership of the actual asset and is not an unsecured creditor of a highly indemnified product provider.
IS GOLD PRICED IN DOLLARS?
The short answer is no- despite the perception by many, including experts, that it is. It is correct to say that the most commonly quoted gold price is the price of gold in dollars. However, German, Swiss and Chinese investors buy gold from brokers and banks in local currency terms – in euros, Swiss francs and Chinese yuan. Similarly, our UK and Irish clients are quoted in and invest in pounds and euros. We make a market in gold bars in all major currencies and have done so since 2009.
The spot price of gold as quoted in newspapers including the front page of the FT, is the price for physical gold in very large volumes as traded by large bullion banks including JP Morgan and HSBC. They trade gold between themselves and with central banks and other official players- and they make a market in gold bullion bars. These are very large gold bars called London Good Delivery Bars which weigh 400 troy ounces costing about €600,000 per bar – many of which are stored in the Bank of England.
Retail and HNW investors, invest in gold bars (1 kilo or 32.15 ozs) which cost around €50,000 per bar, or gold bars (1 oz) which cost about €1,650 per bar (at the time of writing spot gold in euros is at €1,600 per ounce). Physical gold bars command a premium compared to paper or digital gold- and investors are willing to pay premiums as high as 3% on kilo bars and 5% or 6% for ounce bars. The market is buying kilo bars at 1.5% - and one-ounce bars at 2.5% over spot, so the spread is currently some 1.5% for larger bars and 3.5% for one-ounce bars. Premiums rise in bull markets and when there is much demand, and fall in bear markets when there is less demand.
Investors then pay storage fees of between 0.49% per annum and 1% per annum. Its not a low-cost investment option. It is a premium, safe haven asset and in order to own it in an ultra-secure manner, investors are willing to pay premiums and storage fees. The alternative, is low cost but high-risk gold products.
As with most things in life, you get what you pay for. Price is what you pay but value is what you get.
THE OUTLOOK FOR GOLD IN A WORLD OF MASSIVE EURO, POUND AND DOLLAR CREATION
It is important to think of gold in local currency terms. Our exposures as investors, pension owners and savers is currently to the euro. The outlook for the euro is uncertain to say the least, given Brexit and the likelihood of ‘Italexit’- given the very poor state of the Italian economy and banks.
Strong safe haven demand for gold continues due to concerns about the outlook for the UK, EU and global economy, the unprecedented monetary response of the ECB, the BoE and the other central banks as well as growing concerns that digital currencies will be devalued in the coming months and years.
Gold will protect and grow UK and Irish investors wealth in the coming years, as it did in the 2007 to 2012 period (see performance table above). EG