Murray Asset Management's chief investment officer Lloyd asks whether gold can still protect against inflation.
'When inflation begins to rear its head once more, investors cast around for the traditional means to hedge against it in their portfolios. Inflation, in itself, is not an inherently bad thing – if it were, the governor of the Bank of England would be presented with a target of zero, rather than 2% consumer prices inflation as his ideal outcome.
The steady and gradual rise of prices is generally regarded as a healthy sign of a growing economy and, as long as wages grow in line with inflation, there is a ‘feel good’ factor associated with an increase in pay. All this means that there can be a level of inflation which is viewed as ‘desirable’.
Equity shares are the most widely-understood and widely-held ‘real’ asset – at least, when selected appropriately. There’s no shortage of examples of shares which demonstrably failed to prove their inflation-hedging qualities in recent history. This year alone, Dixons Carphone has lost almost half of its value and Provident Financial three-quarters of its value, thanks in both cases to strategic issues that have led these hitherto reliable mirrors of the health of the high street to stumble rather drastically into the casualty ward. Then there’s the rise in bitcoin, regarded by some as ‘gold for the digital age’ this asset is as ill-understood as it is ill-reserved, but it has rewarded its backers handsomely this year.
For the experienced investor though, the true inflation hedge has often been an asset whose value is unaffected by the vagaries of the stock market; and when looking for a true hedge, one of the most popular calls has often been to buy gold.
Is that true this time around? There’s no question that gold has had a resurgence of interest in the past eighteen months. For the UK investor, a large part of that interest has been in the pricing of gold in terms of the US dollar, whose strength against sterling has only recently begun to falter. Prices in the UK, which stabilised as the oil price retreated to more sustainable levels, have now started to reflect the impact of the higher cost of imports.
Many observers, though, would say that the latest spike has nothing to do with inflation, and that geopolitical factors have come to the fore in the pricing of gold. The nuclear aggression from North Korea, coupled with often intemperate responses from the US president, have meant that gold’s ‘safe haven’ status has lately appeared to be more important than its ability to hedge inflation.
What role, then, does gold play today in an investment portfolio? Certainly, the inflation pressures are still there, albeit they are starting to abate as the march of the US dollar against sterling is tempered with talk by the Bank of England’s Monetary Policy Committee of raising interest rates, to counter similar rhetoric from the Federal Reserve.
Equally, the end game for the political stand-off between the US and North Korea is unclear – and on days when president Donald Trump’s tenure in the White House looks likely to be curtailed, the price of gold often sees another spike.
There are many options available to investors seeking to protect themselves against inflationary pressure, and gold is just one of them. It is, at the very least, a tangible asset.'
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