Why gold is not glittering yet for investors although all signs point to an impending market downturn

Stephen Vines says gold, the traditional safe haven in times of market upheaval, seems to be performing poorly despite the US-China trade war, political instability in Europe and currency depreciation in emerging markets

PUBLISHED : Wednesday, 26 September, 2018, 10:44am
UPDATED : Wednesday, 26 September, 2018, 10:33pm

What on earth has happened to the concept of safe havens in the world of investing? More specifically, why has the performance of the gold price been so lacklustre at a time when political and economic uncertainties are mounting?

The list of uncertainties is impressive, ranging from the impact of the ever escalating US-China trade war, the enormous level of political instability in Europe where only one significant country – France – has anything approaching a stable government, and anticipation of the Brexit disaster only makes matters worse. Then there’s the spectacular collapse of currencies in places like Turkey and Venezuela, accompanied by less spectacular but none the less impressive currency dives elsewhere.

At times like these, the lure of gold, as the ultimate store of value, usually takes centre stage. Indeed, many gold pundits were convinced that once the price of gold reached the US$1,200-an-ounce mark, the metal was set for an upwards trajectory. Instead, the price has stubbornly hovered around this level since this breakthrough came in August.

Even though there is no big financial crisis right now, the possibility cannot be excluded. It is instructive to be reminded of what happened to gold in 2008, during the last big financial crisis when, by the year end, the price of gold stood at around US$870, rising to US$1,087 by the end of 2009, an upward trend that lasted until 2012.

With hindsight, it seems like a no-brainer to have concluded that an ideal moment to buy gold would have been once the massive stock market run ended in 2008.

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And here we are again – US equity prices are hitting new records but no sane person believes that this upward surge can go on forever. On the contrary, once the euphoria of the Trump tax cuts and the surge of good earnings’ reports fades, the reaction will be rapid and almost certainly overdone.

Indeed, the general investment picture is pretty weird because what usually happens is that when US bond yields rise, stock prices decline. Yet right now both bond yields and stock prices are rising.

What all this suggests is that there is a greater appetite for risk all round, so there is less enthusiasm for safe havens. Yet many of these risks are quite massive. The US-China trade war is unlikely to be pursued without wider consequences for the global trading system. The preoccupation of European governments fighting for their own survival does not provide fertile ground for sound long-term planning but offers every incentive for short-term fixes that can have terrible consequences.

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Gold does not inevitably do well when stock markets crash – this was the case between 1980 and 1982 and again in 1998. However, more often than not, there is a direct correlation between steep falls in stock prices and a surge in the gold price but, strangely, at least in my view, not a surge in the price of silver.

There is something about gold, which is held in almost mystical esteem by a large coterie of gold nuts who insist that this gleaming metal is the only true store of value, untrammelled by the vagaries of government policy or what they often view as conspiracies to manipulate the markets.

It is safe to say that most of the time, the gold nuts are precisely that — nutty. But every dog has its day, even though gold is usually a poor investment, carrying no yield and often incurring costs of storage.

Gold has always had a big following in Chinese and Indian communities where it has proved to be a reliable value preserver in times of uncertainty. The consequence of this affinity for gold has created an easily accessible and much used trading system for private investors in Hong Kong. Elsewhere, people have been too poor or, ironically, too stable to give much of a thought to gold.  

Anyone investing in gold over the past six months will have seen the value of their investment shrink

The current situation would appear to suggest that gold shirkers are right – anyone investing in gold over the past six months will have seen the value of their investment shrink. It may be inching up right now but there is nothing to get excited about.

Yet have things changed so fundamentally that gold can no longer be regarded as a useful part of a balanced portfolio at times like these?

The jury is still out and reasons remain to give gold nuts a wide berth; nonetheless, there are moments in the investment cycle when gold has its place, maybe for not too long, as other assets shake and tremble. That moment may well have arrived.

Stephen Vines runs companies in the food sector and moonlights as a journalist and a broadcaster