The Pure Gold Company
The Pure Gold Company are referred by Money Observer as “one of the main gold investment players within the market” and report on an increased amount of gold demand ahead of the election with short-term volatility looming
By Kyle Caldwell
Investor demand for gold has been on the rise in the days leading up to the general election vote, which takes place on 8 June.
Two of the main gold investment players – Bullion Vault and the Pure Gold Company – have both noted an uptick in investment demand for the yellow metal amid political uncertainty over how the general election result will pan out.
Shortly after the election was called six weeks ago, the common view was that the outcome of the vote seemed pretty clear-cut, with all the opinion polls pointing to a big victory for the Conservative Party, led by current prime minister Theresa May.
May is still expected to strengthen her grip on the House of Commons by upping her previous majority of 17, but previous predictions of a majority of as high as 100 now look on the high side, given that various opinion polls across the board have cut the Conservative Party’s lead.
In order to hedge out the market risk of a shock Jeremy Corbyn victory for the Labour Party, there’s been a 49 per cent increase in financial professionals purchasing physical gold over the past week, notes Josh Saul, chief executive of the Pure Gold Company.
He adds: ‘We’ve seen a 64 per cent increase in people investing in gold for the first time, citing fears that a further terrorist attack will add uncertainty to an already volatile market.
‘In addition, people are preparing for the unexpected. We have seen a 49 per cent increase in financial professionals purchasing physical gold to hedge themselves against the expectation of short-term volatility, counterparty risk and the possibility of sterling dropping in value following a potential Corbyn victory.’
Adrian Ash, research director at BullionVault, also notes there has been an uptick in investor demand for gold, but plays down the general election as being a big driver. Instead Ash says gold enthusiasts have been topping up their holdings to take advantage of a drop in the spot price during the month of May.
During the course of last month, gold prices fell 1.6 per cent in May against the US dollar on a daily average basis, and dropped 3.8 per cent and 4.6 per cent versus the pound and euro respectively.
In addition BullionVault notes the number of its clients starting or adding to their gold holdings last month rose more than 28 per cent from April, reaching its highest level since last December.
But Ash cautions that as a rule general elections rarely move gold or other investment prices. He adds: ‘2016’s Brexit referendum, like Donald Trump’s win as US president, were exceptions rather than the rule – no doubt because, both times, traders and money managers mis-read the outcomes in advance, guessing that a tight race would leave the status quo in place.’
Moreover, Shaun Port, chief investment officer at Nutmeg, the digital wealth manager, adds that UK investors need to recognise that holding gold at this juncture is primarily a bet on the pound falling against the dollar. He says that over the past three years the behaviour of the gold price has often moved in tandem with bonds and at present appears to be pricing in a small premium for geo-political risk, which is unrelated to the general election.
‘Investors need to be clear why they are holding gold in a portfolio. Is it a bet on falling real yields, or that US (global) inflation will rise, or a hedge against a rise in geopolitical risk?
‘But most importantly, UK investors need to recognise that this is a bet on the pound falling against the dollar. If the Tories win with a convincing victory, the pound is likely to rally, leading to losses on gold holdings,’ says Port.
On the other hand, the shock of both Brexit and Trump’s election proved that gold can move on political headlines – but only if that news hits other financial markets, adds Ash. This is down to the fact that over the long term gold’s real value for investors is as financial insurance.
He adds: ‘We might get some fireworks in the markets if Theresa May wins anything less than a thumping majority, but only in the pound’s exchange rate and the London stock market. That could impact gold prices for British investors, but gold probably won’t react in dollar or euro terms even in the event of a shock hung parliament.
‘Bullion will likely only jump if the Labour Party manages to win, currently priced at 7/1 against by the bookies. Such fat odds might sound worth a punt, but actually that offers terrible value for British residents given the huge market impact to sterling, the FTSE and pretty much every other UK asset if Labour does win.’
Gold: the pros and cons
There are various factors to weigh up when deciding whether to go for gold, but as a starting point, as a rule of thumb it is worth limiting exposure to form only a small part of a diversified portfolio. Both the gold spot price and gold funds, which specialise in buying mining businesses, are notoriously volatile.
On the positive side gold is viewed as the standout safe haven investment. The yellow metal is seen as an insurance policy, due to the fact that it is genuinely uncorrelated to the fortunes of equity markets.
Moreover, as James Luke, manager of the Schrdoer ISF Global Gold fund, points out, gold has also in the past proved its worth as an effective inflation hedge, and given the printing of money by the world’s central banks in the course of quantitative easing programmes, there is every reason to argue that higher inflation is coming in the future.
Against that, one of the main downsides is that gold does not have a yield, nor does it generate cash flow or profit. It is therefore difficult to value. Instead its price simply reflects what the next person is prepared to pay for it, so it tends to be volatile.