Four reasons to buy gold during times of uncertainty
With just months until Britain leaves the EU, and talks of another recession gathering pace, professional investors and governments have been adding gold to their portfolios. Increasingly the man-on-the-street retail investor is following suit. But why is gold the go-to asset during times of uncertainty?
It helps to create a balanced portfolio
The key to successful investing is balancing your risk. Stocks pay dividends, and bonds and savings accounts pay interest so the original investment grows.
Property, art, wine and other tangible, but volatile, investments rely on rising prices to enable a return.
Gold isn’t viewed as a risky asset, but it can go up or down in value and it doesn’t pay a dividend or provide a return unless the price rises. That said, gold’s performance in the decade between 2006 and 2016 outperformed the FTSE 100, 10 & 20 government bonds, UK property, savings accounts and inflation. It’s clear to see that when uncertainty hit its highest point in 2008, equities and property values plummeted and gold increased in value.
This trend tends to influence investors to dump their equities or property and invest in gold if they believe a crash is about to happen. A fortnight ago FTSE 100 lost £36bn (2%) in one day which is the largest fall since 2008. Gold has increased by 3%. The Pure Gold Company on that day saw a 236% increase in the amount of people removing exposure to equities to purchase physical gold.
In preparation of a stock market correction or crash
Because stocks are a very popular type of investment, a stock market correction, or worse, a full-blown crash, would affect billions of pounds in assets and impact everyone with a stake in the market. Hence the recent rush to buy gold. Investors won’t usually put all their assets into one type of investment, but they are increasingly hedging their other investments with gold in case the market takes heed of the geopolitical instability and stumbles, falls or crashes. If you’re a new gold buyer, this might be a great time to increase your investment.
To hedge against inflation
But there doesn’t have to be a specific crash to merit a gold rush. Many commentators predict a grinding rise in global inflation after years of financial stimulus. Gold is an inflation hedge because it maintains its value even when a currency is devalued (which often happens when inflation rises).
Central banks are starting to raise interest rates in a bid to stave off inflation, but this in turn will have an impact on the high levels of both household and government debt (making it more expensive to pay off the debt). Households who default on mortgage debt could spark a property slump, and emerging economies could find it hard to repay their dollar-denominated debt as interest rates rise.
To safeguard against counterparty risk
Following the collapse of Northern Rock and Lehman Brothers, regulators have been putting banks through their paces to ensure that they can weather another financial crisis without needing a bailout. But even this is no guarantee that the financial system won’t come under immense pressure again. Investing in gold is a way to safeguard investments from counterparty risk (the risk that whomever is facilitating your investment can pay it back to you when you want to withdraw it). Owning physical gold takes your investment out of the global banking system and removes this counterparty risk.
Investors can choose to store their own physical gold (although there is an insurance risk), or they can store it in a reputable bullion vault facility that is fully allocated and segregated. This means that 100% of what you have purchased has been assigned to you and it has been separated from other client’s gold and is being held within your own account or vault.
Joshua Saul is CEO of The Pure Gold Company