Editorial: Investors wake up to the appeal of gold

If the price of gold in a local currency is a measure of national risk, then the United Kingdom is apparently in a worse place than during the Black Death of 1348-1349 (which killed half of the population), the Great Plague of 1665-1666 (which killed 25% of Londoners) and two world wars.

If that wasn’t enough, the party season is over in England for another year. We have just celebrated ‘Glorious Goodwood,’ albeit behind closed doors. Traditionally, this five-day festival (July 28 to August 1) of fashion, high society and world-class horse racing marks the end of the summer social season in England. The ‘London Season’ began in the late 17th century, and the Dukes of Richmond have hosted the race on their land in West Sussex since 1801.

Because of Covid-19, the season never started this year, of course, and the party mood in the U.K. is further soured by the added burden of stalled Brexit trade negotiations. The British are accustomed to adversity, however, and, like gold investors, have historically made provision for boosting security in times of distress.

We travel on the left for good reason; it allows horse riders to keep their sword-arm facing any oncoming threat (most people are right handed). For the same reason we built the stairs in our medieval castles spiralling clockwise going upward — it gives a distinct advantage to right-handed defenders fighting above. Our parliamentarians were also risk averse, designing the width between the seats of opposing parties in the House of Commons to the swipe distance of two swords.

The history, and current mood, is similar across the channel. The Eurozone has just suffered its worst quarterly decline in economic activity for 25 years. The region’s GDP fell 12.1% between the March and June quarters, and economists are likening the fall in economic activity to war-time conditions, especially in the hardest hit countries of Spain, France and Italy.

From an international perspective, there are almost US$15 trillion of debt trading at sub-zero yields, Covid-19 is flaring up, and there is growing tension between numerous developed countries and both Russia and China. Even the U.S. Treasury, usually a bastion of positive income, is now dogged by negative real yields once inflation is taken into account.

With risk rising and vanishing returns from debt and equity markets, it is hardly surprising that investors have turned to precious metals to store their wealth.

Gold has just crashed through the psychologically important US$2,000 per oz. barrier, and when measured in euros, the price of gold has been in an almost perfect rising trend for the past two years. On Aug. 17, 2018, the precious metal was trading at only €1,027 per oz., and gold reached yet another all-time high of €1,720 per oz. on Aug. 5, a rise of over 67%. Here in the U.K., the performance has been even more impressive, with gold rising from an interim low of £911 per oz. on Sept. 16, 2018, to £1,556 per oz. recently, a rise of almost 71% in two years.

If buying gold represents a distrust of all other asset classes, then things in the U.K. are at their worst for 750 years. In terms of sterling, we can chart the real price of gold back to 1270. According to data from the Bank of England, the inflation-adjusted price of gold reached £1,200 per oz. in the mid-15th century, but either side of that peak was barely £800 per oz. and less than £500 per oz., respectively, during the Black Death and Great Plague. These bubonic plagues (ironically also from Asia) were followed by almost 200 years of relatively stable gold prices at around £300 per oz. (based on annual averages).

On another historical note, September has long been the best month for gold (often attributed to the festival and then wedding seasons in India). If history repeats itself, gold bulls are in for an extended ride.

— Dr. Chris Hinde is director of Pick and Pen Ltd., a U.K.-based consulting company he set up in 2018 specializing in mining industry trends. Previously, Chris was Reports Director, Metals & Mining, for S&P Global Market Intelligence, with responsibility for its quarterly State of the Market publication. Prior to that, Chris was Editorial Director of Aspermont U.K., whose publications include the Mining Journal and Mining Magazine. He was instrumental in launching the Mines and Money series of conferences. Chris is a mining engineer and his career has included underground work with Anglo American in South Africa, consultancy with both SRK in Johannesburg and Golder Associates in the U.K., and stockbroking with Schroder Securities in London.