Gold still a great hedge in a crisis

Gold has just had its best week in living memory – or at least since October 2011, which seems forever after the recent market turbulence. Last week, it gained 5.5 per cent in five days and has risen 16.7 per cent so far this year, contrasting, as it always does, with every other commodity.

That means that it is fulfilling its traditional role, becoming once again the reliable contra-cyclical performer when investors lose faith in paper money and the financial system. Gold loves a crisis, the bigger the better, and in the past few months t has come back into its own.

At the height of the “fringe bank” crisis in the UK in the mid-1970s, Jim Slater, facing the collapse of his financial empire, famously talked about his essential investment being a case of baked beans, a bag of Krugerrands and a shotgun to guard them.


In 1979, after the Shah’s departure from Iran and the subsequent destabilisation of most of the Middle East, there was another rush for gold with the price hitting an all-time peak of US$862 an ounce, a level it would not breach for nearly 40 years.

In 1993, Sir James Goldsmith, a lifelong gold bull, announced he was a “colossal bull” of the precious metal, which was due a run, and began buying physical gold at about US$300 an ounce. He did so basically because, with his habitual pessimism about the financial markets, he was convinced that a great crash was on the way which would wipe out the world’s banks.

George Soros, an even more successful investor than Goldsmith, soon joined in although for different reasons: Mr Soros had done his usual cool analysis of the market and concluded the case for buying gold was strong. The Russian mines, once the biggest suppliers of gold, were mined out and the Russian bank was having to sell from a diminishing pile of reserves; there was an embargo on buying South African gold; demand for jewellery in the Far East, particularly China and a surging India, was rising rap­idly; the Belgian and Dutch central banks, followed by others, had sold their gold holdings and the supply from central banks had dried up. Edouard Balladur, then the French prime minister and a gold bug of some standing, decided the time was right to add to France’s gold reserves and the Germans followed.

The news that these two legendary investors were in the market quickly spread – indeed they encouraged it to spread – and soon everyone joined in, including the investment strategist Paul Tudor Jones and the Sultan of Brunei. That drove the price from $300 an ounce to over $400, but the bull run soon petered out, Mr Soros lost interest, took his profits and moved on and when Goldsmith died in 1997, he had a large part of his considerable fortune still stuck in physical gold.

The low point for gold was reached in May 1999, when the British chancellor Gordon Brown rashly sold off half of Britain’s gold reserves, which then amounted to $6.5 billion, at $282.40 an ounce. This is still known as “Gordon’s Brown Bottom”.

By 2007, before the sub-prime crisis began to develop, gold had climbed back to $600 an ounce, which is when it really took off. In 2008, the year of Lehman Brothers, the bailout of the banks and panic in global markets, it was nearly $1,000 and in 2011, before the world’s economies got into their recovery (such as it has been), it reached an all-time peak of $1,895 for a three-fold increase in five years.

The other side of that particular coin, or Krugerrand, is that it then fell again to just over $1,000, but even that fall is modest compared to other commodities – copper has halved in a year and platinum, once considered a rival to gold, has drifted back by 20 per cent to $947. At its peak it was over $2,000 an ounce. We won’t even talk about oil.

How far does the rally in the gold price go now? Are we to have another of those famous bull runs when gold makes the front pages and analysts begin talking about $2,000 and even $3,000 an ounce – as they were 30 years ago?

The big drawback for gold has always been that it offers no dividend, there is a cost of storing and insuring it, and it is no longer an essential component of a central bank’s reserves. But as interest rates are now historically low to negative and dividends are being slashed, that is not such a drawback.

Jorge Bernstein of Deutsche Bank was cautiously optimistic about the price the other day: “The market fundamentals have improved … supply is flattening and the interest rate hike trajectory now looks to be flatter. Furthermore, China’s depreciating renminbi [yuan] has provided possible addi­tional demand for gold as consumers search for assets that can preserve capital.” And the Indian economy, one of the biggest users of gold jewellery in the world, is still booming.

At the end of the day, gold is a great hedge: if the market turmoil continues, then gold is a sure bet. If this period turns out to be no more than a blip along the recovery point, then it will go nowhere. Either way, it is not a bad place to hold at least a portion of one’s holdings in uncertain times. And times have seldom been as uncertain.

Ivan Fallon is a former business editor of The Sunday Times.

business@thenational.ae

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