Twenty-four carat case for gold

AS WARREN Buffett famously said: “You can’t eat gold.” But US dollars are not particularly nutritious either and neither are pounds sterling. However, the amount of food you can buy with your gold is steadily increasing, and has been for the last decade; whereas what you can buy with a wallet full of fiat currency in your local Waitrose has been declining rapidly.

It’s not the cost of living that has been spiralling, but the purchasing power of the currency that is being steadily eroded by the loose monetary policy of central banks. And last week’s announcement of another round of the Fed’s controversial quantitative easing (QE) program is yet another boost for gold prices.

Put simply, when there is loose monetary policy and increased US inflation expectations, gold is a buy. And the Fed’s latest round of monetary expansion is bigger and wider in its scope than any of the stimulus attempts that preceded it. The Fed is committed to monthly asset purchases of $40bn (£24bn) until a substantial improvement is seen in the economy. The Bank of America forecasts that the Federal Reserve balance sheet will reach $4 trillion by 2014 – more than 24 per cent of US GDP.

“I’m an unabashed gold bull,” says Nick Beecroft, chairman at Saxobank. “I would view all QE exercises as an experiment with incalculable consequences, simply because we’ve never been here before in large, developed markets.”

Gold is not the only asset out there that has benefited from QE and will benefit again. Other precious metals and commodities as a whole have been given a boost – partly due to their risk character and partly due to their dollar denomination – as well as equities and bonds. Silver is up 4.2 per cent since the Fed announcement, but its industrial applications make it a more volatile bet. Gold is the purest loose monetary policy play there is. Equities give some inflation hedging, as do other commodities, but you also face other externalities affecting their price.

But does the open ended nature of this round of quantitative easing change the game? With no end point for the markets to focus on, it presents a very different scenario for investors. “Now QE has gone extreme, with the Fed’s adoption of a financial outcome as a goal – ‘substantially’ lower unemployment – with no limit on the amount of QE, then yes, the world has changed,” says Beecroft. “Equities will do well, unless things really get out of control – then you need gold – so it should form at least 10 per cent of a portfolio right now.”

With US labour statistics struggling to show any improvements during previous QE programmes, critics are sceptical that things will be different this time around – meaning that QE will run and run, providing the ideal conditions for a continuation of the gold bull run that smashed all records over the last decade. Frederik Nerbrand, global head of asset allocation at HSBC make a long-term forecast of $3,000 an ounce.

But despite the huge gains that gold has made over the last decade and its huge future upside potential, there has historically been a low take up of gold as an investment in the UK. This has been partly due to many investors witnessing the implosion of the gold price in the 1980s, when interest rates skyrocketed, benefiting cash savers. But it has also been discouraged by UK financial advisors for other reasons. Gold bullion is seldom bought by UK retail investors for short-term gains. It is instead bought as a very long-term investment. Whereas with an equity, an adviser can charge a commission on frequent transactions, gold has never provided the same source of revenue for financial advisers – a situation that the World Gold Council describes as being “suboptimal for clients’ risk preferences and diversification prospects.” The Gold Council has an obvious vested interest in investment in the yellow metal, but makes a valid point. When the Retail Distribution Review comes into force at the end of the year, it will radically change the way that financial advisers give advice and remove the fee and commission structures that incentivises finance professionals to champion investment in equities over gold.

With Western central banks unlikely to tighten monetary policy at any point soon, the argument for gold has never been stronger.