Why gold is the safest port in a financial storm

When the world is turned on its head by unexpected events, gold is the safe haven no investor can afford to ignore.

Dean Jamieson November 13, 2016

In an uncertain world where once unthinkable events are occurring almost every single day – take Britain’s exit from the European Union for example or Donald Trump as the president elect of the United States, the oil price being sliced in half just months after the naysayers warned us of the imminent ‘peak oil’ apocalypse and new wave authoritarianism in NATO member state Turkey – the perennial attraction of gold never changes.

Sure, prices fluctuate – surging more than 20 per cent this year – and some greenhorn traders get burned trying to make a quick buck (as they often do with oil trades too). But as a stable long-term investment over years, if not decades, gold trumps everything. Even government bonds and real estate are comparatively volatile.

After all, governments can fall and property rights can evaporate with exogenous events like war. Gold, however, is somewhat of a safe haven. Consider the raw data. In 1792, the gold price was $19. Today, it sits beyond $1,300. Even taking into account more than 200 years of inflation, it is still an impressive upward trajectory.

For, as all the evidence shows, gold is not subject to the standard boom and bust economic cycles. The fact is demand will always outstrip supply. Any price dips are usually temporary and related to uncertain sentiment, and wild market speculation, rather than anything of substance or trading dictated by logic. But what is for certain is that there is only so much of the precious metal in the universe. Mining – so far only on Earth – can uncover more of what is already there, but there is no gold factory at the end of the rainbow. Not unless we are going to journey into exploding supernovas and black holes in the outer universe to retrieve it.

Given the logistical problems of such capers, let us stick to the supply here on Earth. According to investment guru Warren Buffet, a man now legendary for making the right call, the total amount of gold ‘above ground’ in the world could fit into a cube with sides of just 20 metres. That equates to around 171,000 tonnes. Estimates put the amount of new gold mined every year at 2,500 tonnes. The ‘vampire squid’ investment bank Goldman Sachs even suggested we hit ‘peak gold’ (the time when maximum extraction is reached) in 2015.

Other analysts say there will be no fresh gold to be discovered come 2030 because what is left will simply be too deep in the earth’s core to reach.

Perhaps the scarcity is what prompted British new romantic group Spandau Ballet to name-check the precious metal in their 1983 hit Gold. The lyrics famously state: “Gold. Always believe in your soul. You’ve got the power to know. You’re indestructible. Always believe in because you’re gold.” Indeed, so strong are emotions for the shiny stuff that this writer once witnessed a group of slightly inebriated right-wing politicians break into song when the Spandau singer Tony Hadley walked into a party conference hotel. The usually stiff politicians were shouting the Gold lyrics at the top of their voices. The song, like the bullion, left its mark on these men who had no doubt invested a packet in gold.

We know that up until 1971, when US president Richard Nixon ended the international convertibility of the dollar into gold and fiat (paper) currencies became the norm, the global monetary system was also tied to the precious metal through the Bretton Woods system. And still today the majority of central bank reserves are gold assets – 75 per cent in America and 57 per cent in the eurozone. In an age of high-frequency trading and bitcoin mania, those with serious money still prefer a real-world asset that is tangible; something not subject to the vagaries of an algorithm. 

It is clear that the fascination with gold runs deeper than the cold hard numbers of financial markets though. It has rare physical properties in that it is tough, resilient and easily stored. On top of that, it shines brightly and is malleable so can be used in everything from trinkets to high-end jewellery. Not to mention the fact that it is non-toxic to us humans in small measures, meaning gold leaf is becoming ever more popular as a cocktail ingredient or fine dining garnish.

So what does the future hold? Will gold remain the number one ‘long game’ asset class? In short, yes. If anything, the return on investment will improve. Money and power is shifting from west to east, from developed to emerging markets, from countries with relatively small populations to those with vast headcounts. With that geopolitical rebalancing comes a huge fresh demand for gold, as the new middle classes in population giants like China and India discover their hunger for the precious metal.

In addition, as alluded to already, the current affairs earthquakes out there are myriad – providing grist to the mill for sanguine gold investors looking for that safe haven during times of woe. Global economic instability could come from a number of avenues: Brexit, a Trump White House, civil unrest in Turkey, the lacklustre oil price, regional conflict in the Middle East and a deepened sovereign debt crisis in Europe as well as a further correction in the Chinese economy. The list goes on.

Without doubt, history shows us that gold prices spike during economic downturns. And the correlation between public realm chaos – whether it be a political crisis or a financial markets debacle – and an exponential rise in gold prices is proven without question.

As currency and precious metals analyst Georgette Boele, of Dutch bank ABN AMRO, puts it: “With Trump as president, gold prices will likely perform well because we expect that his policies will be inward looking and will weaken the fundamentals of the US economy. In addition, his rhetoric and policy actions could create domestic and international uncertainty at best and upheaval at worst.”

Dr Nasser Saidi, former chief economist at Dubai International Financial Centre, backs her sentiments. “Gold tends to have value mostly during times of great uncertainty – it keeps its value in relative terms as currencies depreciate and bourses remain stagnant,” he says. “And unlike other commodities such as oil, the price of gold tends to be counter-cyclical, rising in response to negative stock market shocks. When markets are volatile and investors are feeling fearful – risk-averse in investment parlance – gold tends to outperform other assets.”

There is a real sense of Schadenfreude when it comes to being a gold trader or bullion investor it seems. Of course, it is entirely understandable to hedge against global shocks through a reliable stalwart asset class. Why wouldn’t you do it? And as that secret becomes public knowledge to the masses in India, China and elsewhere among the tiger economies then gold may well experience a boom the like of which it has never seen before. But rest assured, it is unlikely to be followed by a bust. Just take Spandau Ballet’s word for it: “Gold... You’re indestructible. Always believe in because you’re gold.”