Bank deposit accounts are generally paying zero interest, and traditionally ‘risk free’ government bonds offer a negative yield. Is gold worth considering as a place to park cash?
Why do people buy gold?
Gold commentators will tell you it’s irresponsible not to own at least some gold. Do they have a point?
Gold has limited industrial use and yields nothing. According to the World Gold Council, jewellry demand accounted for 57% of gold demand in 2015, but what about the other 43%?
Gold is widely in demand from a diverse range of interests: from regular savers and investors all the way up to large institutional players such as Central Banks (who in 2015 bought the second highest annual total since the end of the gold standard, led by China and Russia).
It’s worth considering that gold may not be an ‘investment’ but that is it simply money. History is littered with examples of how it’s proven to preserve purchasing power.
One could also think of gold as insurance – For example insurance against Central Bank money creation or unforeseen financial market panics – the kind of insurance that you can cash in any time and has no recurring premium. One very recent example is the 13% appreciation in the sterling price of gold one day after the Brexit referendum.
Policy makers can, and do, make mistakes. Owning some gold is potentially one way for people to protect themselves. Gold is a safe haven and has no counterparty risk. Unlike the currencies we use every day it cannot be devalued. However, like all assets gold is not without risk… there are plenty of factors which can lead to lower gold prices.
We are living in truly unprecedented economic times. Interest rates have been trending lower for more than 30 years since the dark days of inflation in the 1980’s. But since the global financial crisis we have moved into uncharted territory with quantitative easing (QE), zero interest rate policy (ZIRP) and now negative interest rate policy (NIRP). This has contributed the highly unusual situation of negative yielding government bonds and zero rates on bank deposits. In August banks across Europe started to impose negative interest rates on some deposit holders – do not be surprised to see this happen in Ireland for regular deposit holders.
In this ‘NIRP’ world, one of the reasons traditionally voiced against buying gold (that it yields zero) is less valid. In fact we could be getting to the point that gold costs less to hold than the rate you may be charged by your bank for holding onto your cash.
How does one buy gold?
Gold is very liquid – easy to buy and sell in many different ways. For small investors it doesn’t have to be in large amounts.
Gold can be bought in physical format – for example 1oz bullion coins costing approximately €1,200 at the time of writing, or gold bars starting from 1oz up to much larger sizes.
Gold can also be bought in the form of a listed security, for example an Exchange Traded Fund (ETF) or in a fund managed by an asset manager, and can be held in certain pension structures. Gold mining stocks are used by some investors as an indirect play on gold.
There are different costs and risks associated with all of the above, and factors to consider such as storage and insurance.
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The content of this article is for general information purposes only. It does not constitute investment advice as it does not take into account the investment objectives, knowledge and experience or financial situation of any particular person or persons. You are advised to obtain professional advice suitable to your own individual circumstances. Ardbrack Financial Limited makes no representations as to the accuracy, validity or completeness of the information contained herein and will not be held liable for any errors or omissions.