“If you were a German in 1916, there was only one asset that could have saved you between then and 1945 — and that was gold,” says Rory Gillen, founder of gillenmarkets.com. Bank deposits and German government bonds were wiped out during the world wars, which also put paid to businesses and properties.
“Gold, as a currency that is accepted globally and is outside the banking system, offers a type of insurance against inflation and political and economic breakdowns,” Gillen adds. “The price is determined by demand and supply, and when stresses come to the fore demand rises, and so too the price.”
With inflation at the fore and Russia’s invasion of Ukraine continuing, gold seems to be having a moment again. On February 23 — the day before Russia attacked — the price of gold was €1,690 an ounce. At time of writing it is €1,821, representing a rise of 7.75 per cent.
Perhaps the yellow metal’s biggest appeal — especially at the moment — is its reputation as a hedge against inflation. Unlike currencies, the amount in existence doesn’t vary. In recent years some analysts have questioned its value as a hedge against inflation. Nevertheless, it is far less vulnerable to inflation than some other forms of investment.
Gold is also considered a “safe haven” in that it tends to either do well or hold its own when the stock market goes down, and it is also another tool to diversify a portfolio. Yet a holding in gold may not bring a profit, won’t pay any income — although some mining companies do pay dividend — and although it generally maintains value in the long term, it can be volatile in the short term.
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Stephen Flood, director of bullion services at GoldCore, says the purpose of gold in a portfolio is not so much to make a person rich but to calm them in turbulent times. “We fully expect a major market correction, but anyone who owns a bit of gold won’t be panicking because they know they have something real that is independent of the financial system,” he says.
How to invest
There are essentially three ways to invest in gold: buy the physical metal itself; invest in gold exchange-traded funds (ETFs); or buy stocks in gold mining companies. GoldCore offers the first of these options, and Flood says it has been “out the door” with queries lately.
It experienced a jump in demand when Covid first hit, but this fell back a bit until events unfolded in Ukraine, which has once again accelerated the level of interest from investors.
“We are exceptionally busy, with many clients looking to buy gold bullion for the first time,” he says. The company’s GoldSaver account allows clients to build up an investment in gold over a period of time by putting away monthly savings. Account holders can choose an amount, starting from €100, to divert into gold each month.
Although the marked jump in demand for gold is only becoming evident now, Flood says the seeds were sown long before Russia’s war on Ukraine.
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“A lot of people on the fringes would have been looking at the amount of quantitative easing being produced by central banks and thinking that it was only a matter of time before that tsunami of money would find its way on to main street and drive up the prices of everyday goods,” he says. “This eventually destroys demand, as people hunker down, and we are just in the early stages of that.”
The big story, however, Flood adds, is the weaponisation of the monetary system. He says it is rare to see a country the size of Russia getting kicked out of the Swift monetary system in a matter of days. “You also had the Russian public removed from MasterCard, Visa and Apple and Google Pay. This will have long-term consequences for the public.”
With up to 6,000 active Irish investors, GoldCore’s average investment is €25,000, and the minimum is €5,000. About 60 per cent of clients pay to have their gold stored and insured, with the rest taking delivery themselves. Fees for this range from 1 per cent a year for €5,000 to 0.49 per cent for more than €750,000, while buying fees go from about 1.5 per cent for larger volumes to 4.5 per cent for a few small bars. Profits on gold are subject to capital gains tax but not stamp duty.
With gold ETFs you do not directly own physical gold, or the related ETCs (exchange-traded commodities) where you do indirectly own some metal. In neither case will you face storage costs linked to buying bullion. You will pay fees, but these are generally low.
Ralph Benson, co-founder of Moneycube, usually advises clients who want gold in their portfolio to choose a gold ETF or ETC through companies such as BlackRock, Xtrackers or Invesco.
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BlackRock’s iShares Physical Gold ETC owns gold bars that are stored in JP Morgan’s London vault. Investors effectively lend to the fund, which uses the money to buy gold. Benson says that fees will set you back in the region of 0.12 per cent and are therefore “dirt cheap”.
“For most people who want exposure as part of their portfolio, this is a simple way to do it,” he adds.
According to Flood, ETFs are a fantastic option and easy to get into, but he warns that investors should remember that they are buying a derivative or proxy instrument, which does not come with the same “systemic insurance” as the real deal. “For people who don’t expect the system to fail, there’s nothing wrong with ETFs,” he says.
The mine field
The third approach is to buy stocks in gold mining companies, but this is a decidedly riskier play for the ordinary investor — particularly, notes Benson, given current events. “There’s a good chance that investors would have exposure to Russian goldminers and might therefore be faced with a write-off,” he says. “You’re introducing political risk and also the risk that companies might mismanage themselves.”
Whatever way you get into gold, though, for those looking to buy in a hurry because of what’s happening in Ukraine, it may be a little late for the metal to do its job, Benson says.
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“You want to be holding the gold [rather than buying the gold] when markets turn negative, as they have done over the past eight to ten weeks,” he says. “A lot of our customers would hold an exposure to gold all the time.”
Benson says that 5 to 10 per cent is, for many investors, a reasonable proportion of a portfolio to have in gold. However, this also depends upon where the rest of your money is invested.
Not only gold glisters
Benson says that silver has risen more than gold this year and palladium has shot up, while the other one to watch is platinum. He says there are also other options not correlated to shares that can give you protection in an inflationary environment. Benson cites the example of the wind farm operator Greencoat Renewables. “This is a business with a lot of assets in Ireland that throws off a very good regular income and has been very stable in recent months,” he says.
Future prices
Rory Gillen says that for anyone who believes that inflation is embedded and likely to sustain itself at current levels, gold should continue to be in demand and will most likely rise in price. “But if you think inflation will abate, as central banks argue, then gold could peak at current levels,” he adds.
Gillen fears that inflation may well have taken hold. “Global debt levels are over $300 trillion [€271 trillion] and double the level just prior to the global financial crisis,” he says. “In contrast the entire global gold market is worth no more than $13 trillion. As I can’t see a way out of the global debt problem, I am of the view that demand for gold will remain strong and that it is headed higher.”
