Those holding a proportion of precious metals in their portfolios as an insurance policy against economic turbulence might have expected their stance to have paid off in early July as Grexit fears soared to new heights.
But the metals failed to shine. The gold price – which topped $1,900 per ounce in 2011 – stayed confined within its $1,150-$1,300 trading range of the previous 18 months and has since moved even lower. Instead, major currencies proved more popular safe havens.
There has been comparatively little demand for the Swiss franc, which has had its attractiveness dented by government interference, or (until the August sell-off, at least) for the yen – potentially weakened by quantitative easing. Hence the dollar has been the primary place of refuge, followed by sterling.
In truth, it has probably been just as much a flight to what were perceived as the safest short-term government bonds, rather than an actual desire to hold different currencies.
Schroders head of global macro Bob Jolly says: “Trying to explain [June and July] on fundamentals is a forlorn task because it’s been much more about capital preservation. It’s the capital that flows around the world that explains the currency.”
Nevertheless, gold and silver have traditionally been valued for capital preservation qualities, and Physical Gold director Daniel Fisher does not have a definitive answer as to why they haven’t been this time. He says: “It’s like asking an umbrella seller why people are buying lots of rain macs during a wet spell.”
Some experts feel that the fact gold and silver are priced in US dollars provides the primary explanation, because when the dollar is strong the metals become more expensive in relative terms for those in other currencies.
Axa Wealth head of investing Adrian Lowcock says: “This relationship only tends to be really clear when there’s a strong trend, and we’ve had a strong trend in dollar strength so there’s been a clear weakness in gold and silver. The situation hasn’t surprised me.”
However, others feel this has only had a partial impact, stressing that the dollar price for the precious metals has itself remained flat. Other factors highlighted include the slowdown in demand from China, a more robust global financial system, lack of inflationary fears and a slowly unfolding scenario in Greece as opposed to a sudden shock. Demand has also been limited by gold and silver having already become a more significant part of investment portfolios and by the fact that many institutional investors got their fingers burnt by entering the previous bull market too late.
But the inability of precious metals to pay an income at a time when interest rate rises were on the cards in the US and the UK may have been the most important factor.
John Ventre, head of multi-asset at Old Mutual Global Investors, says: “It’s easy to be in gold and silver when the opportunity cost is low, but we could see even more money flowing out of them if we start to see positive interest rates around the world.”
Accendo Markets head of research Mike van Dulken also suspects demand for gold and silver could fall away further, especially if China proves unable to maintain growth of at least 7 per cent. He feels there is no guarantee demand will ever return to previous levels.
“I think markets now have thick skins and can put up with a lot more in terms of shocks than they used to be able to,” Mr van Dulken adds.
But Hargreaves Lansdown senior analyst Laith Khalaf hasn’t ruled out precious metals becoming popular again.
“I don’t think we would need inflation, but more another threat to the entire financial system to get them racing around again,” he says.
“Unlike Lehman Brothers, which was plumbed into the entire financial system, Greece was far more isolated because many international banks had severely trimmed their exposure.
“For retail investors I don’t think foreign currencies are safe havens, even the dollar. Your best safe haven is in your own currency as that’s where your liabilities are.”
Daniel Stewart & Co chief economist Alastair Winter doesn’t believe either currencies or precious metals can be considered safe havens, only safer assets.
He explains: “I’m not sure there are safe havens any more. There are safer assets such as US Treasuries, where Uncle Sam will pay upon maturity, but they can fall in value. However, I can see gold and silver coming back as safer assets, especially if inflation takes off.”
Edmund Tirbutt is a freelance journalist
