As an asset, gold is entirely speculative. It provides no income or dividends, and has few industrial or medical applications. Investors buy it only in the confidence that humans’ peculiar and enduring fascination with the lustrous metal will ensure its value through the decades and centuries to come.
Unlike other securities, its price is not dictated to any large extent by supply and demand. “Gold trades more like a currency and its price is driven more by monetary considerations such as inflation, interest rates and exchange rates,” writes Nitesh Shah, commodity strategist at ETF Securities. As “Trumpflation” expectations grow, along with anticipation that the US Federal Reserve will begin hiking interest rates more rapidly next year, the gold price has duly fallen. Even a new Sharia standard for investing in gold, which could see some of the $2 trillion currently invested in Islamic Finance assets reallocated to physical metal and other products, the price impact would be limited, said Shah.
Its price may have fallen but people continue to buy gold. It has always been a hedge against fears of inflation, devaluation in paper currencies, and has outperformed (as a Federal Reserve Board study has found) during periods of market volatility.
Rather, it is how we hold it that is changing. According to the World Gold Council, inflows into exchange-traded products – a type of security – were the main reason for the increase in demand during the third quarter of this year, while demand for physical gold in the form of bullion bars, coins and jewellery fell sharply.
Across the world, and even within Europe, there are different attitudes to holding physical gold. Citizens in China and India – by far the world’s largest markets – and even Germany, hold much more than others. The UK holds hardly any. Why is this?
Don’t trust the state
One historical reason to hold physical gold has been a suspicion of fiat currencies, and the government or central bank’s ability to manipulate them.
Since the Bank of England abandoned the gold standard in 1931, when the pound stopped being redeemable for a fixed amount of gold bullion, a long period of political calm and relatively stable inflation has endured in Britain, with the brief interlude of the 1970s. This may have allowed Britons to become distanced from the idea of holding physical gold at all.
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“In the West, we’ve become completely hypnotised by the idea that the central bank or government is reliable,” says Ned Naylor-Leyland, manager of the Old Mutual Gold and Silver fund. “In the East, people don’t see government that way, so they tend to store value in physical metal and spend the paper issued.”
During the stock market boom from 1980 to 2000, the UK’s banks stopped selling physical gold over the counter, notes Adrian Ash, head of research at BullionVault. London is still the global capital for trading wholesale, but bars and coins are rarely found on Britain’s high streets. In Germany, Austria and Switzerland, however, bullion can still be procured over the counter in many retail banks.
To what extent has a collective memory of wartime occupation or hyperinflation shaped the attitudes of some European nations? Ross Norman, chief executive at Sharps Pixley, sees a connection between Germans’ appetite for gold and their propensity to save four times as much as their British counterparts. “The UK may have faced spiralling inflation in the 1970s, but the Germans have lost their wealth three times in 100 years,” says Norman. “The UK has enjoyed a long period of economic and political stability, and the option of buying financial insurance has been less compelling, perhaps.”
According to Ash, developed and less stable markets have different patterns of gold demand. He points to Turkey, which has been overtaken by Germany in recent years as the world’s fourth largest buyer. “With terror attacks, a coup and Isis on its doorstep, Turkey is now looking to liquidate its gold. It accumulates when times are good in preparation for when they aren’t.”
The same the world over
Of course, tax is another factor which could dictate a particular nation’s attitude to holding physical gold, rather than a security. Bullion bars are liable for UK capital gains tax, while some coins are not. And many investors would prefer to hold shares in mining companies, whose risk profile offers higher returns than physical bullion, not to mention the costs of storing and insuring physical metal in a vault.
Read more: Coining it? The case for gold bullion coins
India is different. In 2011, Macquarie estimated that more than three quarters of Indian household savings were in gold. The lion’s share of the country’s holdings are in jewellery, not bullion or coins.
It has been historically poor access to other kinds of savings vehicles, particularly in rural areas, which has made the metal a key staple of any portfolio. India has to import most of the gold it consumes (around $25bn a year), and years of sustained demand` has caused the country’s current account deficit to widen, and the rupee to weaken, producing a cycle in which “you keep buying gold because the rupee keeps going down,” says Ash.
It has also proved useful for avoiding tax. In October, Shekhar Bhandari, executive vice-president of Kotak Mahindra Bank, told Reuters that “black money” – funds obtained illegally or not declared for tax purposes – accounts for 10 to 30 per cent of the country’s gold demand. Prime Minister Narendra Modi has imposed a 10 per cent tariff on imported gold, and much is traded on the black market. “The fact that wholesale Indian gold prices have been well below London quotes this year suggests there is a lot of metal around on the black market,” says Ash.
There was another rush to buy the metal last month after Modi announced another corruption-busting measure – the demonetisation of all 500 and 1,000 rupee notes which made up 86 per cent of cash in circulation in the country. It has been a hugely disruptive venture, and a lack of new bills has brought about a cash crunch, right in the middle of India’s wedding season when demand for gold jewellery is highest. As a next step in his fight against black money, it is rumoured that Modi has set his sights on gold holdings themselves.
The Chinese government may also be changing its attitude. Before 2004, private citizens couldn’t buy gold at all. But when the US Federal Reserve implemented quantitative easing in 2009, China accused America of monetising its debt. “State television adverts were broadcast encouraging Chinese citizens to go out and buy gold,” says Naylor-Leyland. “It was a fascinating response.” Now, it is thought that Beijing authorities have restricted gold imports to curb the outflow of dollars from China’s shores.
It seems that distrust in a government, and the currency it controls, is the primary motivation for buying gold, however you choose to hold it.