The role of gold is not played out yet

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Enormous havoc

To the surprise of many, the devastation caused by the coronavirus on the stock exchanges in recent times also didn’t leave the gold untouched. Whereas the shiny precious metal was generally considered a safe haven in turbulent times, there was now little talk of it. Where the precious metal still held up somewhat in the first weeks of the heavy correction on the stock exchange, it lost its reputation built up over the decades in the third week of March. A fall of 11 percent in a week was too much. The once so safe gold went under due to the massive flight to US government bonds, the dollar and the Japanese yen. And that while the price for a troy ounce had risen sharply in the run-up to the corona crisis.

Role played?

Has the role of gold as a safe haven been played out? A closer look at recent developments does not indicate this. In the first place, investors in physical gold or in Gold ETFs and futures are now the first clouds of dust of the crisis that have risen somewhat, but are still a lot better off than investors in equities. For example, gold currently stands at USD 1657, nine percent higher than at the beginning of this year. The day the S&P 500 index went down by almost 12 percent, gold lost only 2 percent. Still, a confirmation of its status as a safe haven.

A repetition

So why did gold lose so much value in this crisis? That was because investors who were in the stock market with borrowed money – think mainly of speculative investment funds – were summoned by their bank to repay their loans or sell their positions (at a loss). In most cases the former was chosen. This meant that the money had to come from somewhere else. Since gold was still at a profit at the time, this was an ideal candidate to sell. Many of these speculative investment funds were also in gold. So it happened. This was nothing new by the way. During the crashes of 1987, 2001 and 2008 exactly the same thing happened. For example, gold fell by 25 percent in 2008. Only then to start his enormous advance to his All-Time High in 2011.

A nice return

Gold is often dismissed by investors as an investment that, unlike shares and bonds, does not pay interest or dividends. This is true. Nevertheless, since the decoupling of the dollar in 1971, an investor in gold has realised an average return of 7.75 percent per annum. An entirely reasonable result. The fact that gold does not pay out can nowadays be seen less and less than a counter-argument. Do you receive more than in a savings account? Or with government bonds? Moreover, now that the government is exerting strong pressure on companies to keep the dividend in cash and not to pay it out, that advantage for shares is also disappearing. Even real estate investors are saddened by the government’s suggestion that rents should not be collected in times of severe crisis.

Money loses value

Gold pays off best when investors start to doubt the value of money. As central banks and governments worldwide pump unlimited amounts into the economy, investors may start to wonder if the amount on a banknote still covers the load. The balance sheets of central banks swell to an unprecedented size. How are governments going to pay off their huge debts again? Print even more money? Inflation is not out of the question. Central banks know that all too well. A reason why that especially the central banks of China and Russia – but also others – have been buying enormous amounts of gold for several years.

This crisis is also passing by

This crisis will pass. To fight it, however, central banks and governments are going further than ever. The bill for these large-scale support operations will be presented at a later stage. If the lockdowns are given up, consumers will start buying scarce products and services again. However, interest rates will remain low. Prices could then spiral upwards. Gold will then not turn out to be such an unpleasant investment. You buy shares when you have confidence in the central banks. Gold is rather an expression of the opposite.

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