Ukraine war hits investors

Demand for gold through the roof as war – and rising inflation – create anxiety.

Fear of the economic consequences of the Russian invasion of Ukraine – and long-term inflation at home – has led to a surge in demand to buy gold in NZ. Tony Coleman, director of New Zealand Gold Merchants, says gold sales have doubled compared to a regular trading month. “It’s out of this world and right up there with the biggest month we’ve ever had.”

He says many people buy gold emotionally. As prices of gold rise sharply investors become emotionally charged with anxiety and make rushed decisions, not understanding that the trend may reverse because the price has gone up too quickly.

“This has happened very recently due to Russia’s invasion of Ukraine, when, according to Bloomberg, news of the first missile strike resulted in the NZ gold price leaping one per cent in five minutes,” he says. “This is similar to the response in 2014 when the NZ gold price rose 6 per cent in the first 14 days with news of Russia’s potential invasion of Crimea.

“But volatility is not your friend and emotion shouldn’t come into it. It is best to buy before you need to and to do so for the right reasons. I would urge investors not to be led by the fear of missing out or what I call FOMO.”

Inflation is also a factor in the surge and Coleman warns we are staring down the barrel of a long inflationary cycle where consumer prices increase sharply.

“This is not just a New Zealand issue and central banks have very little ability to contain them. You are guaranteed to lose buying power if your cash is left in the bank and more people are understanding that having money in a term deposit earning 2 per cent or less when inflation is running at 6-7 per cent is not a good thing.

This is why there is a scramble to move money into gold,” he says. “Consumer demand for gold is through the roof right now and I expect New Zealanders for the first time ever are going to be buying gold in the billions of dollars – and this is Mum and Dad investors, not fund managers and the like.”

He says there are a number of strategies and principles investors can follow to ensure they are not buying in an overvalued market. “Gold investment is about the future, not about being in at any cost and there are not many worse feelings than buying something you have been coveting for some time, then seeing it on discount the next day. We’ve all been there.

“The first part of buying gold at the right time is to invest when the financial markets are calm and the NZ gold price is going down or moving sideways,” he says. “This usually happens in good economic times when you’re not hearing about gold, and everything is cruising along.

“The NZ gold price tends to do the same thing – it just cruises along.”

Coleman recommends investors “dollar cost average” by investing over a longer period of time because no one knows what the future will hold. In terms of prices of gold, he believes it is best to accumulate gold on a regular basis thereby smoothing out the peaks and troughs.

Coleman believes gold has been one of the best investments in recent years with the average price of gold rising by an average of 12 per cent per year over the last 25 years. “This is a substantial increase and a valid reason to hold gold in a portfolio.

“To show this more clearly an average house in Auckland in 1999 cost approximately $250,000, the equivalent of 400 ounces of gold. Today, over 20 years later, 400 ounces of gold is worth about $1.1 million which equates to today’s median house price.”

Coleman says the difference from the property is that precious metals can be purchased in small amounts and more frequently across a period of time, rather than having to invest in a property with a lump sum.