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11/08/20202 mins

Can gold keep its lustre?

Humans have been fascinated by gold for millennia. Prized by the Incas as “the sweat of the sun”, coveted by pioneers of the American gold rush, and worn by millions as a wedding band, the allure of gold is enduring. The price of gold has reached new highs of late, to over $2,000 per ounce. However, the current yearning for gold is down to a different – and rather unusual – set of circumstances.

The first factor to consider is the weakness of the US dollar. Normally the dollar is a sanctuary in times of uncertainty, but, in the midst of pandemic-induced recessionary conditions, we’re witnessing the opposite. The apparent mishandling of the crisis and a ballooning budget deficit may have eroded confidence. As a result, the US dollar has suffered its worst monthly performance in a decade. Assuming that the intrinsic value of gold remains, its price must rise as the dollar falls.

Furthermore, investors often look to gold as a haven in times of instability. An increasingly combative relationship between the US and China, the two great economic powers of the world, certainly provides cause to describe the environment as one of instability.

Looking beyond safety

Most importantly, to us, gold acts as a currency sheltered from the debasement of fiat currencies that comes with unfettered money printing (or quantitative easing, to give it its technical name). In other words, it’s a hedge against inflation.

Inflation hasn’t been a concern for a long time, but its return could become a real issue soon. Policymakers are on a wartime footing as they move to curb the economic effects of Covid-19. That’s largely meant pumping money into the economy – a tactic that’s inherently inflationary. If this policy persists, as looks likely, inflation will  ensue.

Adding to this inflationary pressure, growing trade tensions may make it harder to import cheap goods from China. That’s not to mention the higher costs of operating under social distancing which inevitably pushes up prices of many goods and services. And once inflation takes hold, it’s very hard to put the genie back in the bottle.

Fool’s gold vs golden opportunities

Years of money printing by central banks have created troubling distortions in markets. Companies with overstretched valuations, yet little signs of profit, have been notable beneficiaries. You don’t have to look far to see egregious examples of assets being inflated well beyond a rational assessment of their current worth.

Gold, on the other hand, has an intrinsic value that is being recognised in markets awash with cheap money. We have long favoured gold and have exposure in our portfolio via a number of the world’s leading gold miners. Please, follow this link to see the full list of our holdings.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this article should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.

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