“Gold has a future, of course — but mainly as jewellery,” Niall Ferguson wrote in 2001. On the face of it, the prediction was badly timed. Gold prices soared for the next decade. Gordon Brown’s decision to sell most of Britain’s gold reserves between 1999 and 2002 for an average price of $275 an ounce looks exceptionally careless with the hindsight of knowing that the price peaked at $1,921 in 2011.
Now, after an indifferent performance for several years, gold is soaring again. Although stock markets have slipped this year, gold has risen by 16 per cent. Gold enthusiasts believe that their time has come round again.
Yet I agree with Professor Ferguson’s view. Jewellers and dentists can find a use for gold, but it has few other attractions and doesn’t belong in anyone’s investment portfolio.
Traditionally, there are two reasons for buying gold: as a hedge against inflation and for safety. For example, gold did particularly well in the early 1980s, during a punishing recession when policymakers in the United States and Britain were (rightly) trying to wring inflation out of the system. And the surge in gold prices in the past decade was particularly pronounced after the collapse of the banks in 2007 to 2009.
Gold is back in favour with investors because of their concerns about the state of the world economy. With a slowdown in China and a stubbornly sluggish recovery in the advanced industrial economies, investors are seeking safety.
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The dollar typically does well in times of great uncertainty, as the world’s main reserve currency (though not the only one, as the euro has also established itself). Gold prices are rising through the same investor motivation. Though inflationary pressures are absent from the advanced industrial economies, there’s an unusual reason why current monetary conditions also favour gold.
When cash pays almost literally nothing, as interest rates are zero or even negative, the opportunity costs of holding gold are reduced. Gold investors need to pay the costs of storing their bullion, but at the same time (in countries with negative interest rates, including the eurozone) banks are being charged just to hold deposits at the central bank.
That much explains why investors have been bidding up gold prices this year. Will the bull market in gold continue? From many years of working as an investment strategist, I can give an emphatic answer: don’t ask me — I’m clueless. That’s not being self-effacing. It’s just a fact about gold as an asset class. In the case of financial assets, it is possible for analysts to come up with an estimate of their intrinsic value and compare it with the market price. That cannot be done in the case of gold.
The value of an asset is the cash you can get out of it. A share is worth the future stream of cashflows generated by the company. A bond is worth the future stream of interest payments. A property is worth the future stream of rental payments.
To work out what those future cashflows are worth now, analysts discount them by a rate that reflects both the current risk-free rate (for which the yield on a US government bond is generally taken as a proxy) and a risk premium.
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But gold doesn’t pay any cash. If you own gold, you get no dividends or interest from it. It just sits in the vault. You hope that someone will pay a higher price for it later on, but there’s no objective way, even in principle, of estimating its intrinsic value. Hence investing in gold is pure speculation. Do it if you’re temperamentally inclined that way, but I don’t believe it has a place in an investment portfolio.
Oliver Kamm is a Times leader writer and columnist. Twitter @OliverKamm