Gold shapes as a safe haven in these turbulent times.
By Tony Coleman, Director, New Zealand Gold Merchants
The past three years have been very difficult for Kiwis, one way or another. While some of us reacted very negatively to our liberty being taken away by pandemic restrictions, we’ve all shared the pain of inflation that resulted from the massive fiscal stimulus injected into the economy.
We came through Covid fairly well by public health benchmarks but, as a small country with a correspondingly small balance sheet, we are now under pressure to reduce our large national debt.
We still see small businesses failing as a result of cost pressures, while big corporations that front-loaded their price increases in anticipation of rising inflation, have sailed through just fine. It’s no wonder that faith in the government and major institutions of society has eroded. The new National-led coalition faces many challenges ahead in attempting to reverse that.
It’s the same story elsewhere in the world, with rising geopolitical tension and outright conflict in Ukraine and Israel-Gaza grim indicators. Couple that with the spiralling cost of extreme weather events caused by climate change, and the rest of the decade looks set to be filled with uncertainty.
In this environment, if you haven’t considered your financial risk position, you probably should. Kiwis are fairly conservative when it comes to wealth. We like to invest in property, equities and term deposits. Most of us of working age contribute to Kiwisaver.
While term deposit interest rates currently sit around the 6 per cent mark, parking cash in the bank sees most gains eaten up by inflation. Equities remain volatile and value gains modest while interest rates are high.
Property may be considered ‘safe as houses’ and house prices are certainly returning to positive territory. But the property market is buoyed by immigration, which could be disrupted due to global events, and rising insurance and rates costs will hit homeowners.
Over the past decade, gold has outperformed many investment classes with a 126 per cent return, 50 per cent of which was actually down to the fall of the New Zealand dollar against the US dollar. It is the ultimate safe haven asset during times of economic uncertainty or geopolitical instability, which is why investors have been adding it to their portfolios. In the course of a 14-month period during the pandemic, we added 10,000 new customers for our gold products.
Gold has five big advantages as an investment class:
Diversification: Gold is a diversification tool in an investment portfolio. It doesn’t always move in the same direction as other assets like stocks or bonds, which can help reduce overall portfolio risk.
Limited supply: Gold is a precious metal with a relatively limited supply. While new gold deposits are discovered and mined, the overall supply of gold isn’t subject to the same kind of inflationary pressures as fiat currencies.
Global acceptance: Gold is recognised and accepted worldwide as a form of currency and a store of value. It can be easily bought and sold in various markets globally.
No default risk: Unlike bonds or other debt instruments, gold does not have default risk. When you own physical gold, you possess a tangible asset that doesn’t rely on the performance of a specific company or government.
Store of value: Gold has been used as a store of value for centuries. Unlike paper currency, subject to inflation and devaluation, gold has intrinsic value and is often seen as a hedge against inflation.
We need to face the fact that the uncertainty of recent years wasn’t an anomaly; just the early stages of a sustained period of global turmoil. Some analysts see the price of an ounce of gold rising to more than US$8,000 in the coming decade as a result.
Protecting your wealth
I don’t fixate on future valuations, in part because high gold prices point to some very difficult times ahead which I’d rather not think about. But you can’t completely ignore the risk. Central banks are losing confidence in their fiat currencies after massively increasing the money supply. They have been steadily increasing their reserves of gold.
Bank failures are rare in New Zealand, but even big global players like Credit Suisse have run into trouble this year. The Open Banking Resolution that New Zealand banks were required to adopt, means that, in essence, a failing bank can take some or all of your deposited money if it gets into trouble. There will be no South Canterbury Finance-style bailouts in future.
Every day I talk to people who are anxious about protecting their wealth, their life’s work. They want security for their family and to leave something for the next generation. If you have money sitting in term deposits, or equities exposed to global events, it costs nothing to weigh up the pros and cons of diversifying into gold.