A New Gold Rush?
Daniel Marburger, Director of CoinInvestDirect.com, heralds the arrival of a new type of gold investor. He explores why people are shopping for gold on the internet, looks at future challenges and explains why he’s confident the gold price will keep the new buyers interested.
Some recent meetings with journalists from national newspapers have confirmed my belief that gold is indeed the marmite of investments. One journalist from a very well-respected daily newspaper, for example, refused to entertain the idea of writing about gold within the context of personal finance simply because, he said, the price isn’t interesting anymore.
A cursory glance at our orders, however, will tell you a very different story. The price of gold is certainly not at the high levels we saw in 2008, yet our customers are ordering more than ever. At the time of writing, orders for gold were up by 25% week on week compared with the same period last year. Gold sales per ounce have actually increased by 60% and silver sales by 20%, throughout the year.
When looking for an explanation, it is fair to say that our customers are currently seeing the price as a good buying opportunity. Yet, we believe that the reason for gold’s new popularity as an investment is that it is becoming firmly entrenched as part of the portfolio of the everyday investor. Ordinary investors, who at one time were precluded from access to the precious metal, are now considering its benefits. And here’s the rub, we think there’s far more demand for gold than people actually realise.
Searching for a safe haven
So what’s changed? Fifteen years ago, the gold investment market was very different. Everyday investors had limited access to gold and many regarded it as an irrelevance. Research compiled for CoinInvestDirect.com by the Centre for Economics and Business Research (CEBR) shows that the average price of an ounce of gold between January 1970 and December 2005 was $300. The precious metal peaked at over $800 (over $2,000 in today’s prices) during the 1980 OPEC oil crises. A largely stable price, therefore, exacerbated the age-old objections that gold did not generate income and that it incurred additional costs for storage.
However, since the financial crisis of 2008, gold has been boosted by a period of economic uncertainty. The price was driven up by investors seeking a safe haven for their funds. Further, weakness in Western economies restricted returns on investments in financial assets such as equities, and returns on government bonds were pushed to record lows as interest rates collapsed and central banks pursued aggressive bond-buying strategies, or quantitative easing, to support economic growth.
“In July 2013, Ben Bernanke, then chairman of the Federal Reserve, told the Senate Banking Committee that “nobody really understands gold prices and I don’t pretend to understand them either.”
As central banks moved to increase the supply of money, the value of money fell relative to other goods and services. This effect mounted pressure on investors to diversify their assets, boosting demand and therefore the price of gold. In addition to this, the price of gold experienced a sharp spike as markets learned of the impending bankruptcy of Lehman Brothers. In the ensuing financial turmoil, investors fled to the safety of gold, which pushed the price per ounce up by over $100 within a matter of days. The collapse of Lehman Brothers actually increased the price of gold by 18.6% within just one week.
However, as optimism started spreading in early 2013, gold prices suffered from a downward movement, followed by reasonable stability in the second half of last year. Despite the recent falls, the latest data suggest that, in September 2013, the price of one ounce of gold averaged $1,316. This represents a 324% increase in nominal terms since 2002. Interestingly, prices today are over 70% higher than on the day of the collapse of Lehman Brothers in mid- September 2008.
Encouraging first-time investors
As the years between 2006 and 2011 became a period of dramatic price increases, writing about gold became fashionable and people started to think about how they could access the precious metal. And thanks to the arrival in 2004 of gold-backed exchange traded funds (ETFs), people who wanted to buy gold could now do so. ETFs, regulated financial products designed to provide investors with exposure to the price performance of spot gold bullion, seemed to overcome the difficulties of finding a cost-efficient and secure way to participate in the gold bullion market without having to take physical delivery of gold.
Such was their popularity that, by 25 June 2010, physically backed funds held over 2,000 tonnes of vaulted gold for private and institutional investors. Today, the largest of the physical gold bullion-backed ETFs is SPDR Gold Shares (GLD), which is traded on major stock exchanges around the world, including London, New York, Zurich, Paris and Mumbai.
At the time of the launch of the first ETF, the main objections to investing in gold were that it did not generate income and that it was costly to store and insure. Yet, despite this, the precious metal’s dramatic price rise two years later encouraged many investors to take advantage for the first time. So, from the perspective of the investment industry, ETFs have certainly helped to bring gold investment into the mainstream by giving people easier access. Further to this, gold’s new popularity was aided by regular articles in national newspapers and online journals, which extolled the benefits of its inclusion in an investment portfolio.
Buying gold in a new way
In 2006, Dr Ulrich Byszio came to the UK to seek a way to democratise gold investment and give people the opportunity to invest in the commodity itself. As a result, he set up the internet-based CoinInvestDirect.com, which enables people to buy gold and silver online.
Ulrich Byszio established credible relationships with leading mints around the world. This approach ensures that, as an official distributor, CoinInvestDirect.com can provide genuine high- quality gold bars and coins in large quantities.
As a purchaser of substantial quantities of gold, the company is able to ensure its cost-effectiveness and pass savings on to its customers. In addition, it has set up gold storage and insurance options for its customers.
While ETFs undoubtedly helped to change the gold investment landscape, we found that many investors prefer to hold gold in their own hands. Therefore, CoinInvestDirect.com and other companies like it have introduced this new way to buy gold. Gold can now be purchased online as easily as food, clothes, toys and music, with the bars or coins arriving by post just 48 hours after a customer has placed their order.
Who are the new consumers?
Someone recently asked me if all gold investors were doom-mongers – people who feared the future and were motivated by an inherent fear of financial Armageddon. We find the opposite to be true. Indeed, gold investors are ordinary people who run companies, financial or otherwise. They can be everyday employees, high earners or low earners, some of whom invest a substantial part of their overall portfolio in gold. What they do have in common, though, is a desire to protect their wealth.
On average, we find that our customers spend £5,000 every time they invest. Gold currently exceeds silver in popularity and most customers opt for the 100 gram gold bar along with the 1oz maple leaf gold coin. And what most people do not realise is that British legal tender gold coins, such as the Britannia or Sovereign, are exempt from capital gains tax, which ultimately makes them more tax-efficient than ETFs.A recent article in The Telegraph said: “A balanced portfolio should hold an allocation of about five per cent in assets such as gold. The future is uncertain and gold is the most effective insurance against that.” Interestingly, most of our customers tend to invest around 5% of their wealth in gold.
“The price of gold is certainly not at the high levels we saw in 2008, yet our customers are ordering more than ever.”
We also tend to see lots more interest and activity when the price is low. We believe that the reason we are seeing an uptake in investor demand right now is because our customers regard price stabilisation as a buying opportunity. To illustrate this, our figures show that there are generally 100 buyers to every one seller at today’s prices.
Significant growth from emerging markets
Looking ahead, we believe that one of the biggest hurdles for the gold industry generally is to educate customers about the complexities of the gold price itself. In July 2013, Ben Bernanke, then chairman of the Federal Reserve, told the Senate Banking Committee that “nobody really understands gold prices and I don’t pretend to understand them either”. If the chairman of the Federal Reserve can admit to such perplexity, it is not surprising to find that the gold price can baffle everyday investors.
We recently asked the Centre of Economics and Business Research (CEBR) to produce a report about gold. Our aim was to address the concerns of our customers and look at the fundamentals propping up the gold price. We wanted to explore some of the macroeconomic determinants of the price of gold and the causes of its more recent movements, both up and down.
The report suggests that gold demand tends to increase against a backdrop of economic, financial and geopolitical uncertainty, which is certainly not news to anyone familiar with the gold market. It also discovered that gold becomes a more attractive substitute for storing value when risks associated with assets such as government bonds increase in the face of political uncertainty and debt concern. Further to that, gold demand has a tendency to increase when there is a risk of high inflation and this, in turn, increases its value compared to a currency that is at risk of losing value.
What did come as a surprise to us, however, was how attractive gold has become as a store of wealth in emerging markets where financial sectors are somewhat less developed. Indeed, the BRICs economies alone have almost doubled their share of world gold reserves since 2003. In addition, there is a robust growth of demand from emerging markets, where consumer appetite shows little sign of slowing. Going forward, demand for gold is likely to become more reliant on the personal consumption and savings of individuals and central banks in emerging markets. According to the CEBR report, recent demand for gold has been high in Asia and the Middle East, stoked by continuing economic development within these countries. Demand for gold has risen from both individual consumers – in the form of jewellery, bars and coins – as well as from central banks that have added gold to their reserves to diversify their portfolios.
The report has also pointed out that, given gold’s finite nature, the increase in demand from emerging markets is unlikely to be matched by an increase in supply. As a consequence, increase in demand will inevitably lead to a boost in price in order for the market to reach an equilibrium whereby the total quantity demanded matches that available for supply.
Who holds the biggest reserves?
Advanced economies still have the largest amount of total gold holdings, largely as a result of the historic tradition of linking currency to gold. The US holds the world’s largest amount of gold reserves, estimated at around 8,000 tonnes, followed by Germany, Italy and France, which each hold more than 2,000 tonnes. China completes the top five with just over 1,000 tonnes. When looking at the change in gold reserves, however, the report shows a different picture. Advanced economies, such as the US and Germany, have maintained the same level of gold holdings, whilst Switzerland, France and the Netherlands have all reduced their holdings between 2003 and 2013.
Interestingly, and starting from a low base, CEBR’s report shows that emerging markets have made strong gains. Since 2003, Russia and China have increased their gold reserves by 157% and 76% respectively. An increasingly positive attitude to gold as a defence against inflation has resulted in the BRICS economies almost doubling their share of the world’s gold reserves from 4.7% in 2003 to 8.8% in 2013.
Looking ahead to online shopping
The CEBR report reveals that the dramatic rise in emerging market demand has been an unsung factor in the surge of the price of gold over the past decade. With growth in these markets driven by strong fundamentals, emerging demand looks poised to continue to support the price of gold going forward.
In countries with less developed financial systems, gold will retain its appeal as a relatively risk-free store of this newly created wealth. In addition, the trend that has seen central banks worldwide being net purchasers of gold in recent years is likely to continue sustaining demand for the precious metal into the future.
“The report has also pointed out that, given gold’s finite nature, the increase in demand from emerging markets is unlikely to be matched by an increase in supply.”
Overall, the CEBR report shows that the diminishing prospect of ever greater monetary stimulus, which serves to prop up asset prices and hold down returns on other assets, will be countered by the momentum of emerging market growth. And here, the appetite for gold looks set to continue to support demand going forward.
Aside from the industry’s challenges to help educate customers and others about the complexity of the gold price, it is important for companies like ours to stay in the vanguard of the precious metals industry. The next step for the industry is to take online shopping for precious metals to the next level by allowing customers to buy and receive silver without paying VAT.
Ultimately, though, it has to be the role of companies operating within the gold industry to ensure that this marmite of investments is understood and considered as part of any investment portfolio.
Daniel Marburger joined Jewellers Trade Services in London in January 2011 with a specific responsibility to develop the CoinInvestDirect.com business. Before that, he was a banker within the private wealth management division of Commerzbank AG, formerly Dresdner Bank.