ISQ - January 2021

All that Glitters is Gold


By Jeremy Batstone-Carr, Interim European Strategist, Raymond James UK

Key Takeaways

During 2020 there were many stand-out performances amongst the various asset classes and individual investments.

The price of gold increased by 24% over the past twelve months, its best annual performance, in US dollar terms, in a decade.

The price of gold peaked at one point in 2020 to more than $2,000 per ounce.

Whilst a possible US dollar recovery in 2021 would likely push the gold price lower, could that be said to be the same when pricing gold in sterling, or euros?

Amidst all the extraordinary action in the world’s financial markets over 2020 there were many stand-out performances amongst the various asset classes and individual investments. But while many will have a mere moment in the spotlight before flickering and burning out, one ultra-long term asset stands out, its lustre undiminished, gold. The yellow metal price increased by 24% over the past twelve months, its best annual performance, in US dollar terms, in a decade.

There are other assets regarded generally as safe-havens. Those which during times of uncertainty, or insecurity, or economic and political hardship and even war provide somewhere safe for investors to protect their wealth, but none has the unique appeal of gold. This is nothing new. Gold has been regarded the world over as an investable asset for more than 4,000 years. As long-term track records go, there can be few alternative assets capable of maintaining their purchasing power so well.


Over and above its value as a store of wealth, gold is widely regarded as a truly global currency. It possesses intrinsic value, in addition to which it is both beautiful and durable, undiminished as other currencies are by some alien alloy. These attributes have, throughout time, served to render gold superior to all other mediums of exchange. Furthermore, and importantly, it is not “backed up” or in some way diminished by any government or central bank.


As all must be aware, gold has enjoyed a special place in people’s hearts for centuries. It has been hoarded and stolen. People have killed for it and wars have been started over it. They still are. Egyptian Pharaohs were entombed with their golden treasure. The Spanish conquistadors came to get rich under Mayan skies, pillaging the New World as they did so. The Californian gold rush prompted people from around the world to chase the dream of boundless riches. Those who sold the picks and shovels to prospectors grew wealthy for sure, but for those who really did strike lucky also struck rich, very rich.


In the modern era, gold’s story really begins back in 1971, the year the US dollar departed from the gold standard.

In the modern era, gold’s story really begins back in 1971, the year the US dollar departed from the gold standard.

Prior to this, the price of gold had been deliberately pegged for many years. At a stroke, the gold price was free, Bretton Woods lying smouldering as the price began an inexorable ascent.


In the decade to 1981, the gold price increased by a 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 coincided closely with the intervention of the Federal Reserve, the US central bank. The Fed’s intention, then as now, was attempted altruism, propping up the financial markets in an effort to prevent collapse and in so doing preclude financial collapse morphing into an economic Armageddon.
The 2007/08 financial crisis brought the global financial markets to the very brink. Hard decisions had to be taken, and extremely swiftly.
Quantitative Easing was born in a moment of desperation. It continues to this day. Quite literally, trillions of dollars, pounds, euros, yen and other so-called fiat currencies have been electronically “minted” to save the economy.

In so doing, and as a welcome aside, the financial markets have 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 skyrocketed 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 be the same when pricing gold in sterling, or euros? For long-term investors keen on diversifying portfolios and happy to ride-out short term fluctuations in financial markets, whilst building-in some safe-haven protection, gold’s unique appeal should make it extremely alluring.

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DISCLOSURE

Issued by Raymond James Investment Services Limited (Raymond James). The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance is not a reliable indicator of future results. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. The taxation associated with a security depends on the individual’s personal circumstances and may be subject to change.
The information contained in this document is for general consideration only and any opinion or forecast reflects the judgment of the Research Department of Raymond James & Associates, Inc. as at the date of issue and is subject to change without notice. You should not take, or refrain from taking, action based on its content and no part of this document should be relied upon or construed as any form of advice or personal recommendation. The research and analysis in this document have been procured, and may have been acted upon, by Raymond James and connected companies for their own purposes, and the results are being made available to you on this understanding. Neither Raymond James nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such research and analysis.
If you are unsure or need clarity upon any of the information covered in this document please contact your wealth manager.
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