Page 26 - ISQ January 2021

INVESTMENT STRATEGY QUARTERLY

Prior to this, the price of gold had been deliberately pegged for be the same when pricing gold in sterling, or euros? For long-term
many years. At a stroke, the gold price was free, Bretton Woods investors keen on diversifying portfolios and happy to ride-out
lying smouldering as the price began an inexorable ascent. short term fluctuations in financial markets, whilst building-in
some safe-haven protection, gold’s unique appeal should make
In the decade to 1981, the gold price increased by a it extremely alluring.
massive 2,329%, from $35 per ounce to $850. It then
receded, lying dormant for twenty years, to 2001.
Whilst not a perfect fit, gold’s return to the spotlight since then has KEY TAKEAWAYS:
coincided closely with the intervention of the Federal Reserve, the
US central bank. The Fed’s intention, then as now, was attempted • During 2020 there were many stand-out performances
altruism, propping up the financial markets in an effort to prevent amongst the various asset classes and individual
collapse and in so doing preclude financial collapse morphing into investments.
an economic Armageddon. • The price of gold increased by 24% over the past
twelve months, its best annual performance, in US
The 2007/08 financial crisis brought the global financial markets to dollar terms, in a decade.
the very brink. Hard decisions had to be taken, and extremely swiftly.
• The price of gold peaked at one point in 2020 to more
Quantitative Easing was born in a moment of despera- than $2,000 per ounce.
tion. It continues to this day. Quite literally, trillions
of dollars, pounds, euros, yen and other so-called fiat • Whilst a possible US dollar recovery in 2021 would likely
currencies have been electronically “minted” to save the economy. push the gold price lower, could that be said to be the
In so doing, and as a welcome aside, the financial markets have same when pricing gold in sterling, or euros?
boomed. Sovereign bond yields have collapsed to epochal lows
while stocks have hit a series of all-time highs.
And so, to today. The world is held in the vice-like grip of a global
pandemic. Systemically significant global central banks have, yet
again, risen to the challenge and done their bit to ward off disaster.
More than $15tr worth of global currency has been created out
of thin air over 2020 alone in an attempt to limit lasting damage
from COVID-19.

In addition to relentless money printing, global central
banks have been persistently cutting base interest rates.
In Japan and Europe, base rates are negative. The proportion of
negatively yielding global government bonds, once regarded as
economic heresy, now regarded as economic normality, has skyrock-
eted to levels never seen before in 4,000 years of recorded history.
The switch from central banks being simply “accommodating” to
going “all-in” has proved the primary driving force behind the gold
price’ latest ascent, peaking as it did at one point in 2020 at more
than $2,000 per ounce.

But what of the future? In the short-term, at least demand for gold
is likely to hold strong while supply remains limited to what is said
to equate to just two Olympic-sized swimming pools of physical
stock. Were inflation to pick-up, or worse, a hyperinflationary event
to materialise, the direct consequence of relentless electronic money
printing and consequent currency debasement, gold’s safe-haven
status would surely be sealed. Whilst a possible US dollar recovery
in 2021 would likely push the gold price lower, could that be said to

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