What Does the Fluctuating Pound Mean for Gold Investment?

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The Pure Gold Company

11/11/2016

In the global marketplace there are few investment certainties. With sterling reaching record lows during October, fears of the effect of Brexit on the UK economy and even more potential problems as a result of the forthcoming US election, investors are having a hard time looking for safe and intelligent options. So what do the the recent alarming fluctuations in the value the pound mean for those considering investing in gold?

There is always gold

The financial magazine Money Week confidently asserts, ‘we’re big fans of gold for one simple reason: it’s a fantastic way to strengthen your portfolio.’ During volatile financial times this is reassuring. Speaking to the US Fed’s National Banking seminar in early October, billionaire Ray Dalio from Bridgewater Associates said, ‘holding non-financial storeholds of wealth like gold could become more attractive than holding long duration fiat currency flows with negative yields (which is what bonds are), especially if currency volatility picks up.’

Gold and the flash crash

During the recent ‘flash crash,’ when sterling tumbled by about 10 percent from $1.2600 to $1.1378 ‘in a matter of seconds’ according to Reuters, the price of gold rose by about 5% in the same period of time. In early October gold in terms of sterling value was 3.3% below the recent price highs of £1,057/oz seen in early July, following panic buying as a result of investment after the Brexit vote. However, after this small and expected levelling in the UK, gold has been doing well throughout October.

Stability is rare

Whatever you are thinking of investing in, currency, precious metals, or the stock market, there will always be highs and lows – that’s the nature of the beast. The gold price in early October in the US has been dropping but investment specialists at Goldman Sachs believe that this is only temporary, and given the prospect of potential Chinese investment in gold as well as ‘stronger exchange-traded fund buying’ the price could well be on the up. Gold has been performing well in the UK in response to recent sterling fluctuations.

The banks are investing in gold

Major analysts on both sides of the pond recommend that investors take advantage of the relatively low price of gold. Banks across the globe have upped their investment in gold in recent weeks. And, a recent study published by the Official Monetary and Financial Institutions Forum (OMFIF) shows that banks have increased their gold reserves by by 2,800 tonnes of bullion, demonstrating that they believe that gold has ‘renewed attractiveness as a safe-haven asset’, to use a phrase from the OMFIF’s David Marsh and Ben Robinson.

Major city players are investing in gold

The city analysts always keep a watching brief on the activities of Lord Rothschild’s RIT Capital Investment Trust, and over the last few months the trust has reduced its exposure to the vagaries of sterling by 34%. The trust was already increasing its investment in gold at the end of June, as in common with other investors it believes that gold has demonstrated the properties that have led it to become known as a ‘safe haven’.

The individual investor

These are unchartered waters for the UK economy, because no-one actually has any idea about the final shape of Brexit, and the world in general appears to be in such a state of flux. Even the Financial Times has labelled the Brexit outcome as ‘uncertain’. It’s against this background that investors are looking at physical gold as an investment. As Lewis Grant, senior portfolio manager at Hermes, the BT Pension Scheme Management firm, has said: ‘people are incredibly nervous. Gold has always correlated with investor’s nervousness. When they don’t have that confidence, it is time for gold and gold stocks.’

When the gold price doubles in value like it did between 2008 and 2010, it’s not that an ounce of gold is suddenly 2 ounces of gold, it’s that it takes twice the amount of currency to purchase the same amount of gold. The most prevalent example of this is looking at the gold price increase on June 23rd (Brexit outcome) where sterling plummeted and gold became 26% more expensive. However in dollar terms the price of gold increased by only 6% which is probably a cleared reflection of gold demand over that period. Factors like Quantitative Easing, excessive and unwarranted fiscal spending, politics both domestic and international and bank instability all give rise to a depreciating currency. If you live in an environment whereby you think that your currency is about to drop then it is worth holding some of your wealth in an asset class that holds it’s value and has an inverse relationship to a currency drop. Purchasing physical gold has always been the most effective way of hedging against currency risk.

Among the doom and gloom, one theme appears to dominate – that of gold being something serious financial minds are warming to in periods of difficulty.

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"Even the Financial Times has labelled the Brexit outcome as ‘uncertain’. It’s against this background that investors are looking at physical gold as an investment."

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