When all that glitters actually is gold…

When all that glitters actually is gold

With inflation set to rise, gold is touted as an ideal way to protect investments.

Tony Coleman was a young man when he learned a golden lesson – behind every boom there is a bust, leaving him with a lifelong attachment to the protective properties of investing in gold.

Now managing director of New Zealand Gold Merchants, Coleman was in his 20s in the 1980s – the period of excess when no investment seemed to carry risk and growing wealth seemed inevitable.

“I was in my 20s,” he says, “and naively thought I would be able to own a house outright without the necessity for a mortgage. My investments were at sky-high valuations but, within only a few months, all my wealth returned to zero because of the 1987 stock and commodities market collapse. My parents lost their home to the bank just to make sure the lesson was truly learned.

“My hubris was short-lived; I learned a market moving in the same direction can make us look smart – but everything can be lost when the market changes direction and we are not prepared.”

Coleman says he was reminded of these times when ASB recently became the first New Zealand bank to raise interest rates – just before the Reserve Bank released a headline inflation rate of 3.3 per cent.

An ASB 5-year fixed term deposit will pay 2 per cent per annum, so even at the outset savers are guaranteed a loss of 1.3 per cent, says Coleman – who points to a period of inflation as the next big global and local influence on financial wellbeing.

“That fixed term scenario will likely get worse,” he says. “Inflation is primed to soar. Anyone under 40 years old has had a working life of falling interest rates and rising asset prices – but I am warning anyone who will listen that this is all likely to change now, not later.

“Inflation is like a parasite eating your cash – it eats away a little at a time, leaving you a little less wealthy each year. Even when you earn interest, it erodes the principal.”

Coleman says he has been recommending gold as the appropriate response to negative returns on term deposits. Although many believe gold carries risk (which it does), he says it is well proven that gold is a very good inflationary hedge over time.

Even the Reserve Bank cannot hide rising costs which Coleman says are due to:

  • Higher oil prices
  • Severely disrupted freight system
  • Low unemployment
  • Zero foreign immigration
  • Clogged transport routes
  • Increased tax burden

In Switzerland, the Bank for International Settlement (BIS) has elevated gold’s security status to Tier 1 capital. “The BIS is the central bank which controls all central banks – and raising gold to Tier 1 capital asset effectively means that, even in the bank that controls all banks, ‘gold is good’.”

The Reserve Bank has said it will remove some policy stimulus: Large Scale asset purchases have stopped.

“That’s their way of saying we’re going to stop buying Government bonds, we’re going to stop the quantitative easing (printing money) programme and we’re going to let wholesale interest rates lift.”

However, Coleman says it is not yet known when the Reserve Bank will stop the Funding for Lending programme – a $28 billion fund allowing eligible banks to borrow money at the official cash rate.

“Most of these funds have made their way into the housing market and created a frenzy of price activity and very low interest rates,” says Coleman. “When Covid-19 struck, the Reserve Bank required banks to increase their total capital ratio from 12 per cent to 18 per cent. But, due to the predicted downturn in the economy, they withdrew this requirement.

New Zealand trading banks have since increased their total capital ratios mostly by reducing dividends over the past 15 months – which has improved bank balance sheets.

“Even with that improvement, the spectre of rising interest rates and the thought of potential mortgage defaults will be concerning the board rooms of our major banks.”

It’s not just New Zealand either. Over the past 18 months, the world’s central banks have taken unprecedented measures to prop up their economies – including printing money at a record pace, which has the direct effect of diluting the purchasing power of local currencies.

For example, nearly a quarter of all US dollars in circulation has been created since January 2020 – meaning the greenback has effectively lost a quarter of its value. That has sparked interest in Bitcoin, which cannot be reproduced and let loose into the market because a central banker decides to create more of them out of thin air.

“Gold is the same,” says Coleman. “Its supply is naturally restricted by the fact it is a finite resource; most of the world’s cheap gold has already been discovered.”