Why gold thrives under pressure

The metal loves tough times - and global uncertainty is driving prices higher.

Summary: The gold price has been driven higher by no shortage of global uncertainty in the last month - the Brexit vote, combined with low interest rates across the world, has demonstrated that central banks and individual investors alike are still flocking to the metal in the face of turmoil on our markets.

Key take out: Despite the protests of economists, many clearly still see the value in holding gold as a hedge against market uncertainty.

Key beneficiaries: General investors. Category: Commodities. 

Whether Britain takes the “Brexit” road and quits Europe after tomorrow’s referendum, or not, there is one important lesson for investors from the experience: Gold loves a crisis.

After the Brexit scare, which last week drove gold to its highest price in two years, there are more crises to come which could keep the price high, or drive it higher.

The election of President Trump in the US, a possibility which cannot be discounted despite the latest opinion polls, would be a financial markets event like Brexit, on steroids.

Further falls in European interest rates which are already in negative territory would add to gold’s allure as a safe haven, and even a decision by the US central bank to keep interest rates at a record low level would encourage American investors to boost their gold exposure.

The point about Brexit, President Trump and official interest rates being kept lower-for-longer is that all are positive factors for gold and a reason for Australian investors to retain an interest in gold for its status as a hedge against global instability and turbulent currency markets.

Since the start of calendar 2016 gold has been the best performing asset worldwide thanks to it being in a class of its own - one that even the heads of central banks recognise.

The US dollar gold price, which some top investment banks such as Goldman Sachs, had been tipping to fall below $US1000 an ounce has gone the other way, rising by 18 per cent from its first 2016 trades at $US1072/oz to its latest price of $US1269/oz.

In Australian dollar terms, thanks to an unexpected rise in the local currency, gold is “only” up by 14.4 per cent over the past six months, from $A1488/oz to $A1703/oz.

On the stock market goldminers have been the stars of 2016 (and 2015) even with reports of big investors taking profits by trimming their exposure to sector leaders such as St Barbara Mines and Saracen Mineral Holdings.

Since early 2016 St Barbara (SBM) has risen by 92 per cent from $1.38 to $2.65, a strong upward move albeit down on its all-time high of $3.36 reached on June 9. Saracen is up by 144 per cent this year to $1.43, but did reach an all-time high of $1.50 last week.

Most other gold stocks have doubled, or come close to it this year. Even Newcrest, a perennial laggard has been joining in with a 71 per cent rise to $21.67, down slightly on a 12-month high of $22.97 reached last week.

Britain however, with a potentially monumental decision looming regarding its role in Europe, is a good place to see how gold performs in a crisis. In pounds, gold is up by 19.5 per cent from £724/oz to £865, a move which reflects the higher US dollar price and falling pound.

British investors, concerned about what comes after the Brexit vote, have been rushing into gold with activity on a trading platform operated by the Royal Mint up by a third this month compared with May.

According to a report in this morning’s edition of The Financial Times newspaper, the 32 per cent rise in gold sales at the Mint has boosted the historic institution’s revenue by 150 per cent.

Bullion Vault, which also operates a number of gold-trading opportunities for investors, reported an 85 per cent increase in its number of British accounts.

What happens after the Brexit vote will be closely watched on all markets, with investment banks planning to have fully-functional trading desks all night to handle what could be the biggest day for transactions in decades.

The Governor of the Bank of England, Mark Carney, has warned that the value of the British currency could depreciate, “perhaps sharply” if the “Leave” votes wins the referendum.

An even bigger rush into gold by British investors would have a meaningful effect on gold supplies, but a much more important factor could be the reaction of European investors fearful that a British exit would be a precursor to a wholesale break-up of the European Union, and collapse of the common currency, the euro.

Analysed any way you like the next six months are critical for politics and financial markets, and gold will be a big winner as each crisis develops.

After Brexit there is Australia’s federal election on July 2, an important local event but not one which is likely to affect gold. More important developments include a possible re-run of the Greek debt crisis, routine meetings of the committee which sets official US interest rates (and therefore the value of the US dollar), and the US presidential election – including the ebb and flow of news during the campaign leading up to the vote on November 8.

Mervyn King, a former Governor of the Bank of England, deserves a final word on gold thanks to his status as a man who was Deputy Governor of the bank when it sold the lion’s share of its gold at rock bottom prices in the late 1990s, but who now sees gold as a critical asset.

Writing earlier this month for the World Gold Council, an industry lobby group, Lord King said he was “very struck” by the fact that central banks, governments and individuals have always, despite the protestations of economists, held some gold in their portfolio.

“Obviously, there is no high running return (yield), but when unexpected things happen, particularly when governments rise and fall, then gold is a means of payment that everyone is always prepared to accept,” he wrote.

“And I think that’s why even central banks have always had a role in their portfolios for gold.”