Issue 86
Gold Remains The Haven In The Turmoil of Political Times
As the political race in the UK climaxed with the surprise result of a hung Parliament, politicians across the country took a deep breath knowing that the political uncertainty of the leadership isn’t over yet.
For financial analysts globally, and particularly in the UK, this means the turmoil continues. In a month where we have seen gold climbing to a six-week high, we also heard of disappointing monthly growth gains in the US, suggesting that the labour market is losing momentum. And while the UK employment market looks like it is faring slightly better with a 0.1% increase in Feb-April 2017 figures in the number of employed aged between 16 and64 years, the unemployed figure remains at around 4.6% of the population (source: Office of National Statistics).
In the UK, we have seen the impact of the US Election and the resulting new administration ripple the waves of the UK economy. This combined with the political turmoil of Brexit and the General Election means that the options for those looking for long-term investment are shaky and for security elusive.
Bricks and mortar are no longer a solid investment
For years, the go-to robust investment vehicle was property. Having a second home or a buy-to-let was a sure indicator of doing well for yourself. House prices might dip, but investment in bricks and mortar was a long- term sure bet. Then came the crash of 2009.
Since then, house prices have regained their value and, nationally, the property market has risen in value and confidence. However, the beginning of this property bubble seems to be bursting, with housing experts Nationwide reporting in May of this year that house prices showed a third consecutive monthly decline for the first time since 2009 and annual house price growth dipped to 2.1%, providing further evidence that the housing market is losing momentum (see table 1 overleaf).
“In the UK, we have seen the impact of the US Election and the resulting new administration ripple the waves of the UK economy.”
Corporate retirement funds
So how do we plan for our future? If property is no longer an option, can we sit back and wait for our final salary scheme to pay out (which many of us have been paying into and relying on) to see us right in the golden days of our lives? Pension fund managers have been warning senior financial managers for a few years now about the huge shortfall in retirement funds, and big corporates such as BT and British Airways have been strategising how they will cope with the massive deficits stacked against them. Although there is good news that the pension deficits at the UK’s largest companies appear to be falling, the collective deficit of final salary pension schemes amongst FTSE 350 organisations still stands at around £134 billion. So those who have spent a lifetime paying into the corporate pot might end up realising that the opportunities to give their children and grandchildren the step up they need for the future might not be provided.
Stocks and shares
Those lucky enough to be in a position of having savings or money to invest might have heaved a sigh of relief as the doom and gloom predicted around a stock market crash has failed to materialise. With the FTSE 100 Index rising from 5,929 in January 2016 to 7,337 in January 2017, many who kept their nerve found their investments worth more than they could have imagined 12 months ago. However, new warnings continue, with investment managers such as Adrian Lowcock at Architas pointing out earlier in the year that the FTSE 100 had three prolonged major corrections since 1999, falling by an average of 40.1%1. He further advises investors to insulate investments from a market shock by taking money out of the stock market or moving money into assets perceived to be lower risk. Possibly such as gold?
The unpredictability around the markets seems to reflect the insecurity of the world we are living in, with politicians seen as outsiders winning elections and referendums changing the shape of our futures. What seems abundantly clear is not which investment is more of a sure bet than another, but how fragile the markets are and that we have entered an era where the sure bets are no longer a certainty.
A glimmer of hope on the horizon
Yet, there is a glimmer of hope on the horizon in the midst of all this volatility. The price of gold continues to steadily rise. With the Federal Reserve unlikely to increase borrowing costs, leaving real rates in negative territory, the price of gold has increased significantly in the last decade, peaking at 1,896.5 USD/oz (source: www.lbma.org. uk.pricing-and-statistics).
One of the few investments that are adversely affected by the political crises in the UK and the uncertainty around what it will really mean for the UK to leave the EU, gold, which is traded in US dollars, remains strong. Investors who bought gold 16 years ago would have seen a 400% return on investment, which is 10 times the return from a FTSE 100 investment during that period. In addition, British gold investment coins such as the Gold Sovereign and the Gold Britannia have legal tender status and therefore are exempt from VAT and Capital Gains Tax.
There’s more good news. The golden halo continues to look likely to shine, with the next 16 years looking strong. Gold is a finite investment, meaning that there is a maximum amount that can be sold, so if demand continues as it is, the price will rise as demand outperforms supply.
Is history repeating itself?
Although no longer a commodity used in daily transactions, gold remains important for the global economy. You only need to look at the reserve balance sheets of financial organisations and central banks, which presently hold around 20% of the world’s supply of mined gold, for confirmation that gold has a long-term value. Investors of all levels are attracted to gold because of its unique properties as an asset class. The precious metal is a solid, tangible and long-term store of value that historically has moved independently of other assets. Indeed, custodians of the world’s largest investment portfolios use gold to mitigate portfolio risk and have been net buyers of the precious metal since 2010.
Gold is a highly effective vehicle of diversification and risk management because it is independent from other asset classes. Gold enhances portfolio performance while reducing losses in times of economic turmoil. For example, during periods of financial uncertainty, when equity indices tend to fall sharply and volatility increases, gold’s volatility typically remains much lower than that of equities. In general, therefore, it consistently exhibits low to negative correlation with mainstream assets as well as alternative asset classes. Economic growth boosts demand for gold in the form of jewellery, while recessions promote buying the precious metal as a share of value. It is this balance that drives gold’s lack of correlation to other assets and enhances its appeal as part of an investment portfolio.
“The unpredictability around the markets seems to reflect the insecurity of the world we are living in, with politicians seen as outsiders winning elections and referendums changing the shape of our futures.”
This validation that gold preserves wealth in fluctuating economic markets is even more relevant when investors are faced with a declining US dollar and rising inflation, circumstances in which gold typically inflates in price. Historically used as a hedge against both these scenarios, investors traditionally will turn to a hard asset to maintain the value of their portfolios.
Maybe we shouldn’t be so surprised. If we look back in history to Germany in 1923 and 1945, and more recently to North Korea in 2009-2011, when paper money became worthless at a time of huge political chaos, it was solid investments such as gold that stayed the course and kept their value. Likewise, if we revert to times of collapsing empires and consequential collapse of currencies, it was those who could protect their wealth in a hard asset, such as gold, that maintained it.
Once the privilege of the uber rich, gold is now entering the portfolios of the mainstream, with those looking for solid investments considering gold coins. As gold is easy to buy, requires little paperwork and offers secure delivery, investors can touch and feel their investment and see the long-term future flourish before their eyes.
Maybe we shouldn’t be so surprised. If we look back in history to Germany in 1923 and 1945, and more recently to North Korea in 2009-2011, when paper money became worthless at a time of huge political chaos, it was solid investments such as gold that stayed the course and kept their value.”
From our own experience, we have seen the UK market leading the way, with it now accounting for 23% of our sales, overshadowing Germany, which has remained steady in its consumption of gold coins (see table 2).
If we drill down into these statistics over a two-year period, from 2015-2017, we see a massive increase in the percentage of gold coins purchased, with the UK up over 78% and staggering increases of 234% for Spain and nearly 210% for Italy (see table 3).
Our statistics indicate that it is not just those established and possibly more secure in their investment choices who invest in gold: 35-44 year olds account for the highest level of purchasers with 25-34 year olds and 45-54 year olds accounting for just over 20% of our overall sales.
So, while the political situation continues to be unsettled, with markets volatile and property predicted to stabilise if not dip, gold seems likely to continue to remain steady amongst the choppy waters of the future.
Daniel Marburger is a Director of www.coininvest.com, a German based online retailer of precious metals including gold and silver coins.