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Category: Soap Box

Soap Box: ‘Buy more gold’, say banks

The Bank of America hit the headlines back in April when it forecast the price of gold could reach $3,000 per troy ounce by October 2021. Other banks...

25 June 2020

Gary Mead

The Bank of America hit the headlines back in April when it forecast the price of gold could reach $3,000 per troy ounce by October 2021. Other banks have been raising their price forecasts too.

It’s no surprise therefore that, as Reuters reported on 18 June, “advisers to the world’s wealthy are urging them to hold more gold”. The same story said that nine private (but unnamed) banks “which collectively oversee around $6 trillion in assets for the world’s ultra-rich” had “advised clients to increase their allocation to gold”.

In normal times most financial advisers suggest that, as an insurance against the untoward, investment portfolios should allocate around 5% to gold.

But these are not normal times.

As this useful chart (below) from Reuters shows, there have been more winners than losers so far this year. The gold price has risen by almost 14% so far this year, second only to FANGs (Facebook, Amazon, Netflix and Alphabet, the parent company of Google). In the global lockdown, it’s no surprise that FANGs (which are all on-line) have done well – we have all been restricted to our homes and FANGs are designed for in-home entertainment and other services. But why has gold done so well – and could continue to do well, long after the ‘lockdowns’ have been lifted?

The reason is simple. To combat the massive economic slump – which the International Monetary Fund forecasts will be the worst since the Great Depression of 1929 – governments around the world have pumped into the financial system a collective $10 trillion as of the start of June. The total world public debt, according to some calculations, is now around $78 trillion.

These mammoth debts should be repaid, like all debts.

You or I have to repay our debts – but to extend an old saying, if you owe a bank one dollar, that’s your problem; if you owe a million dollars, that’s your bank’s problem; and if governments owe trillions of dollars, that’s a problem for the world.

Of course, the only reason why governments have felt able to borrow and spend such vast sums is because interest rates are so very low. Much of the world entered a low interest rate environment following the 2008-09 financial crisis. We are still stuck in that environment. Protracted low interest rate environments have all manner of undesirable consequences – one is that governments are tempted to raise their borrowings to levels far higher than their incomes. The UK government debt in May, for example, exceeded £2 trillion for the first time ever.

Does it matter that government debt levels are now so high? It all depends on how markets regard the credit-worthiness of the country. Some countries are regarded as ‘safer’, i.e. more capable of paying interest on their debts, than others.

As global public and private debts accumulate, canny high net worth investors start to worry about the security of their portfolios – which in more settled times, with more attractive interest rates, will include a proportion of national government bonds. In times of anxiety, such as now, those individuals look around for a way of preserving their wealth, and for that, gold is hard to beat.

But gold – physically allocated gold, which belongs to no-one else but you – is no longer just for high net worth individuals. Thanks to Glint, which offers a prepaid debit Mastercard® on which you can load, save and spend physical gold, anybody can preserve their assets and, as The Treasurer discussed a couple of weeks ago in this newsletter, in times like these investing in gold is proven to be safer and more profitable than in houses.

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