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Safe is the new bold

Gold: the ultimate safety asset or a shiny relic of

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At times of uncertainty, people view gold as a low-risk, reliable store of value.

We take a closer look at the well-known investment safe haven

Rhymer Rigby

19

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Gold is the original precious metal. It is rich in symbolism but it’s also rich in function.
Over
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jewellery, ornamentation, medals, electronic
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components, the basis of monetary systems and the titles of countless James Bond
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films. But, recently, people have been reminded of its historic use as a comparatively
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safe store of value.

Last year, the Dutch Central Bank raised a few eyebrows over content published on its
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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.

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 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

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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
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A bigger problem perhaps is that gold prices can and do fluctuate – and often
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considerably. In Davos, in 2010, George Soros famously said: “When interest rates are
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low wethat
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conditions for asset bubbles to develop, and they are developing at the
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moment. The ultimate asset bubble is gold.”

Soros’s call was pretty good: in August the following year, gold peaked. It hasn’t fully
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recovered since – and Options
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,
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why are we opting gold lost almost 30% of its value. More recently, we’ve seen
for nostalgic pop smaller, but still notable falls in the value of gold when tensions
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Paid for by Subaru between Iran and the US have eased. So the idea that gold is risk-
free is far from true.
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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.

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