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Geopolitical uncertainty sees gold demand soar: why is it a safe haven?

Paloma Kubiak
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Paloma Kubiak

We’re reminded gold is a safe haven but why is this and how can you tap into the precious metal?

The tensions between the US and Russia over Syria have sparked a flurry of demand in gold.

According to The Pure Gold Company, it has seen a 73% increase in physical gold investments since Wednesday this week, compared to the daily average for 2018.

It says the primary catalyst was the fear that planned US air strikes into Syria could spark further conflict between the US and Russia with negative consequences for financial markets.

Given the fears, the US dollar-denominated gold price on Wednesday hit an 11-week high as equities and the dollar fell, though the gold price has retreated off the back of positive US data since then.

Chief executive, Josh Saul, says: “56% of financial professionals who invested in physical gold on Wednesday had suffered a fall in the value of their equities. They chose to buy to hedge against the risk of global stock declines and a falling US dollar if the tensions between Russia and the US escalated on the back of an airstrike against Syria.

“We have also seen a 36% increase in first time investors purchasing physical gold amid general uncertainty over President Trump’s policies, a potential trade war with China, volatile global equities and the tensions between North Korea, Russia and the USA.”

Saul adds that customers aren’t necessarily looking for growth in the gold price. “Rather they use the precious metal as a hedge against risk, knowing that if the gold price does increase it usually means losses elsewhere in their portfolio.”

We explain why gold is considered a safe haven, how investors can access the precious metal, and we speak to an investment director to give you ideas for your portfolio.

Gold as a safe haven

Gold has a track record of protection, wealth preservation and security and people rely on this track record to protect them against future market risk – known or unknown, according to Saul.

He explains gold has an intrinsic value and unlike shares, currency or bonds, its value will never drop to zero, and is unlikely to fall beyond its mining cost.

“In times of uncertainty while most other assets fall in value, gold has a track record of increasing in value and therefore the relationship is an inverse one. Gold is also used to guard against the dangerous effects of inflation.

“In times of war, political uncertainty or market or currency risk, market volatility is increased and people become more risk averse which results in gold being sought after as a safe haven asset class,” he says.

Saul adds: “When people expect the financial markets will be strong, most appreciate there is always the possibility of unknown volatility and as such investors are guided to hold 10% of their wealth in gold as an insurance policy.”

How to access gold

There are a number of ways for investors to tap into the precious metal, broadly split between electronic or physical means and the avenue you take will be based on your risk profile.

You can access the electronic gold market via gold funds, ETFs and mining stocks. Saul explains these may be cheaper options, but they’re considered riskier.

“All gold shares or funds are expected to be backed with certain percentage of physical metal. It is understood and ironically accepted there isn’t 100% of physical metal backing each and every certificate.

“The argument here is that if a certain percentage of certificate holders were to sell at the same time, there wouldn’t be enough physical gold to satisfy the amount of certificates and therefore investors would own nothing more than a worthless piece of paper with no value. This happened with copper backed ETF’s a few years ago.”

When it comes to mining stocks, the values are based on the ability for companies to get gold out of the ground, how the company is run etc so even if the gold price is rising, this won’t necessarily be reflected in the returns available to investors.

However, when it comes to purchasing physical gold, it can be more expensive than going down the electronic route. This is because you’re essentially removing your wealth from the financial markets.

“Purchasing physical gold is the real notion of ownership”, according to Saul. “However, storage on a fully allocated and segregated basis is the safest way to store gold. It essentially means 100% of your gold is separated from anyone else’s gold in its own mini vault.”

A few tips from Saul are to only purchase LBMA bars so you don’t encounter problems when selling and it’s important that whatever you purchase is .999 quality which is 24ct gold.

The premiums for gold bars can be less than gold coins but you don’t get the tax advantage and the buy back prices may not be as good which widen the spread between selling price and buy back price.

With UK gold Sovereigns and Britannia’s, any growth you make is free of capital gains tax.

However, Saul warns: “It’s essential that whatever you purchase comes with a Certificate of Authenticity and a Buy Back Guarantee. People often rush into making a purchase but don’t consider how they’re going to exit their investment.”

Gold options for your portfolio

Adrian Lowcock, investment director at Architas, says it’s not surprising investors have been piling into gold given this week’s geopolitical tensions as they’ve become aware of an increase in volatility and risk. As such, some gold exposure makes sense, he adds.

He lists the following options for investors:

Blackrock Gold & General – the fund invests mainly in gold, through gold mining companies. The manager Evy Hambro, has a preference for mature, high-quality businesses which means the fund is well placed to protect investors from falls in the gold prices and share price of gold mining companies.

Hambro is an experienced manager and well resourced, through rigorous analysis the fund is well positioned to benefit from any uplift in the sector. The fund is predominantly invested in large and medium sized companies but can also invest in higher risk smaller companies should the opportunity arise. Stock picking is key as individual holdings typically account for 6-8% of the fund.

iShares Physical Gold ETC – this gives investors a low cost exposure to gold directly as opposed to shares in mining stocks. As such this is a purer exposure to gold as there is no equity element which can move with stock markets in the short-term.