By Curtis Webster, Investment Director, The Seventy Ninth Group
To say that we are facing an uncertain future would be a major understatement. And we can already see the consequences of this for the global economy. Inflation is hitting levels not seen in decades while stocks match the single-day declines of the early months of the pandemic. This has understandably had a knock-on effect on the confidence of economists and those within the financial sector.
So, what does all this mean for investors? It’s perfectly reasonable to feel some anxiety at the prospect of an extended economic downturn and the likelihood of more troubled times ahead. But there are always steps that investors can take to protect themselves in times like these.
As someone with extensive experience in the natural resources sector, one strategy in particular stands out: pivoting to gold as a way to mitigate risk within your investment portfolio. In current circumstances, it makes sense to turn to some of the established wisdom about investing. And where better to look than the much-vaunted status of gold as a “safe haven” asset?
But why is gold so important when crisis strikes? And what are the tell-tale signs that gold may be about to surge?
The ‘one true currency’
Gold is one of the essential foundations of the economy and is therefore hugely valuable as a risk-mitigating asset. The world economies rely on gold, industry relies on it and banks rely on it. We know that without gold, they would all shut down almost overnight. For that reason, you can argue that gold is the ‘one true currency’ maintaining its underlying value in circumstances where other seemingly stable assets can fail overnight.
Market confidence in projected price surge
I’m not alone in turning to gold at a time like this. A range of major global banks and veteran investors are forecasting a substantial surge in the price of gold over both the medium and longer term.
Many prominent financial institutions have revised their gold price forecasts upwards this year – in some cases multiple times. In January, Goldman Sachs raised its 12-month forecast to $2150 per ounce, before raising it again to $2500 in March, noting that the sanctions on Russia would likely push the country to return to buying gold once the Rouble stabilises.
History tells us so
Few commodities have exerted such a strong fascination over such a long period of human history as gold. None, certainly, have played such a varied and essential role in commercial activity. But even though gold no longer plays a core role in the global economy, that doesn’t mean it no longer has value as an asset. As more recent history has shown, gold continues to have significant value because of its capacity to store value over time.
Over the past forty years gold has consistently surged in times of acute global uncertainty – including in the early months of the COVID-19 pandemic. And while gold initially withdrew from its 2020 peak, it has continued to perform strongly through 2021-22. A recent FT report on investments that beat CPI from the 12 months to March 2022 showed gold outperforming other assets by a substantial margin on real returns.
Gold has long been seen as a vital diversification tool for investors looking to safeguard their portfolios in turbulent times. And such an approach has been more than justified by gold’s performance through historic crises.
Hedge against inflation and US dollar decline
Inflation across the Eurozone hit 7.5% in April, while in the US it surged to a 41-year high of 8.5% in March, falling narrowly to 8.3% the following month. Real wages and consumer confidence have declined in tandem, while stocks are continuing to slide as companies revise their earnings projections downward – with the previously buoyant technology sector leading the decline.
In the US the signs are particularly dire, with the S&P 500 approaching bear market territory throughout May. As retailers begin to follow tech companies in reporting declining earnings, the overall trajectory for the world’s largest economy is not reassuring. And where the US goes, others are likely to follow.
Gold stores are known to increase in value over time better than many alternatives, making it highly regarded as a hedge against inflation and the decline of the US dollar.
However, a word of caution on inflationary pressures. There are also signs that something more fundamental is happening to the global economy. Looking to the inflation rate once the more volatile goods such as food and energy are removed – we can see that higher levels of inflation are, as JPMorgan’s Allan Monks puts it, “bleeding” from energy and goods into core services. This raises the prospect that any resolution to the current crisis may not have a significant dampening effect on rising prices and the erosion of purchasing power.
Support communities as part of a balanced portfolio
My convictions about the value of gold and other natural resources as important parts of a secure and well-balanced investment portfolio are not new. And nor are they based solely on data – as important as this is. As part of the recognition of the fundamental importance of gold as an asset, at Seventy Ninth Resources, we have also sought to ensure that we cultivate secure and sustainable roots in the region where our concessions are located, under our stringent Environmental, Social and Governance policies.
This means that investors looking to diversify their portfolios and safeguard against the prevailing climate of economic uncertainty, can also support communities in their efforts to secure a healthy and vibrant future.
This is all thoroughly doable, and in no way hinders the pursuit of gold as a valuable commodity. In reality, it presents real and tangible opportunity to support these regions and bring real change to their lives, and is something we take great pride in. We’re still discovering these impacts and changes, but it is a journey we are determined to see through. We cannot and should not pursue one goal without the other.
It seems clear to me that the well-worn wisdom that gold is the ideal asset for mitigating risk during uncertain times continues to hold true. Given this, now would be the time for investors to look for safe and sustainable ways to increase their exposure to gold to protect their future.