Gold is the original precious metal. It is rich in symbolism but it’s also rich in function. Over millennia, it has been used for coins, jewellery, ornamentation, medals, electronic components, the basis of monetary systems and the titles of countless James Bond films. But, recently, people have been reminded of its historic use as a comparatively safe store of value.
Last year, the Dutch Central Bank raised a few eyebrows over content published on its website that highlighted the benefits of hoarding gold. “Shares, bonds and other securities are not without risk, and prices can go down. But a bar of gold retains its value, even in times of crisis,” its website stated. “If the [financial] system collapses, the gold stock can serve as a basis to build it up again.”
The bank was explaining why it still kept gold reserves. But during these times of economic and geopolitical uncertainty, its words sparked media discussions about investors buying up gold in a flight to financial safety.
Unlike cash, the value of gold isn’t eroded by inflation. It is highly fungible and can easily be converted into hard currency wherever you are in the world. In extreme cases, such as in war-torn countries, if you lose everything else, you can carry a couple of small gold bars out with you. It also has a great heritage and global branding given that people have historically relied on it during times of political turmoil. “For thousands of years gold has been a store of value,” says Adrian Lowcock, head of personal investing at Willis Owen, the online consumer investing platform.
In recent months, the value of gold has increased amid concerns about the global economy and the spectre of a full-scale trade war between the US and China. The price of gold hit £1,278 an ounce last September as large numbers of investors bought into the precious metal during something of a rush to so-called “safe-haven” assets. These are lower-risk assets that are expected to retain their value or even grow in value when other assets fall – thereby helping investors to limit their exposure to losses. “You want assets that perform when the stock market doesn’t,” says Lowcock.
Other safe-haven investments include defensive stocks that are less vulnerable to economic downturns, such as utility companies, supermarkets and other businesses that provide everyday essentials. Likewise, bonds usually offer more predictable returns than shares, and certain currencies such as the Yen and Swiss Franc are also seen as safe-haven investments.
But while gold arguably remains the best-known financial safe haven, its safety as an investment largely depends on what you’re looking for.
One of gold’s chief disadvantages as an investment is that it doesn’t provide you with an income. It pays no interest or dividends, unlike shares or cash on deposit. The only money you make on gold is capital appreciation when the price goes up. However, in an economic environment where interest rates are very low (and bond yields are also very low), a lack of income from gold may not be that much of an issue.
A bigger problem perhaps is that gold prices can and do fluctuate – and often considerably. In Davos, in 2010, George Soros famously said: “When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold.”
Soros’s call was pretty good: in August the following year, gold peaked. It hasn’t fully recovered since – and is now about 25% below what it was then. Indeed, if we take gold’s previous high – in 1980 – it is still below that. So had you bought in early 1980 and kept it until now, you would not have made your money back over 40 years.
But that’s the long term. What about the short term? Well, declines in the value of gold can be pretty rapid – not least because it has become more attractive to speculators in the past few decades. In the period between August 2012 and June 2013, gold lost almost 30% of its value. More recently, we’ve seen smaller, but still notable falls in the value of gold when tensions between Iran and the US have eased. So the idea that gold is risk-free is far from true.
This doesn’t sound terribly safe. But, as Lowcock points out: “It can still be a good safe haven if its price is moving in a different direction to other assets.” However, he adds: “I would only have about 5% of my investments in gold.”
It’s also worth remembering that all safe-haven investments have potential downsides. Indeed, the only safe haven that can’t lose you money is cash – although it can lose you value in high inflation environments and it generally provides a poor return in low inflation environments such as the one we’re currently in.
Of course, economic fundamentals aside, centuries of symbolism mean that gold’s emotional and psychological value is unlikely to fade any time soon. And as our faith in our financial system is continually tested, perhaps it will one day come to symbolise the important value of safety as much as wealth.
Safety matters
Your world matters to us. It’s why we build every Subaru with you in mind, offering the very best protection for you and your family with our award-winning safety credentials. See what sets Subaru apart at subaru.co.uk
