Why people seek refuge in gold during crises like COVID-19

By Vicky McKeever

“Gold is a way of going long on fear,” renowned investor Warren Buffett once said. 

The Berkshire Hathaway CEO explained that if people “become more afraid, you make money, if they become less afraid you lose money, but the gold itself doesn’t produce anything.” 

Investors’ fear levels are particularly high right now, as the coronavirus pandemic turned a global health crisis into an economic one. And it’s uncertain when the world will recover from either of these crises. 

It is in such times of uncertainty that gold is touted as a “safe haven” for those looking for shelter from more traditionally volatile investments, like stocks. 

“Compared to an investment in stocks, where even the biggest blue chip companies can (and have) failed, an investment in gold often seems less risky,” said Adam Vettese, market analyst at investment platform eToro. 

A reliable store of value 

As the world’s earliest form of currency, gold’s physical properties have meant it has long been considered a reliable store of value. It is widely available enough to trade but is in finite supply, so is rare enough to be considered valuable and unlike some metals it is not corrosive, making it durable. 

The price of gold, which is normally in dollars, moves in the opposite direction to the greenback. This is because if the U.S. currency gains in value then it takes fewer dollars to purchase an ounce of gold. 

This was why the gold price went into meltdown last month, explained Vettese, because the dollar rallied. As a result, the spot gold price, the cost at which the precious metal can be instantly traded, fell below $1,500 per ounce for the first time in 2020. 

As the coronavirus crisis deepened in March, Vettese said that risk-averse investors initially flocked to cash. 

Last month’s fall in the gold price was also thought to be due to investors being forced to sell the metal and take profit from its gains, in order to cover losses elsewhere, otherwise known as a “margin call.” 

However, when the U.S. Federal Reserve cut interest rates to zero later that month, there was less incentive to hold dollars. 

Cutting interest rates meant the already low returns that investors received from investing in debt, or bonds, were nudged even lower. 

Gold has since therefore regained its popularity, with the price climbing back up to its highest point in nearly seven years last week, at $1,769 per ounce. 

A shorter supply of the precious metal has also bolstered its price, pointed out Sheridan Admans, investment manager at U.K. stockbroker The Share Centre, as the virus has forced mines to close.

Gold is also considered a good hedge against the risk of inflation because the rising cost of goods and services tends to erode the value of the dollar. 

And as central banks print more money as part of attempts to stimulate economies, Global head of Asset Allocation at investment group Invesco Paul Jackson said some may fear this could result in inflation.

If this were the case this could impact the value of other assets. Meanwhile, “gold over a long period of time tends to hold its value in real terms” so can be considered as a “refuge” against this risk.

High entry point

Jackson referred back to Buffett’s point, however, that people’s main reason for investing in gold was for protection because it does not pay a dividend or interest so “you could also lose money if what you are fearing doesn’t come to pass.”

He added that the gold price has historically been as volatile as the stock market and that the “downside can also be quite dramatic.”

Jackson also pointed out that the price of gold is historically high, as the long-term average price is around $600 to $700.

This is “not to say that the price won’t go higher in the right circumstances” but that the “entry point today is quite high,” he said.

Ways to invest

While people can invest in physical gold “there is likely to be a huge mark-up” on the price of coins, bars or jewelry, said Admans.

Finding a way of storing it safely, as well as finding a market to trade it through, can also be costly, he added.

Buying shares of the companies mining gold was another way to invest. Jackson said this could act as a “leveraged play” on gold, as if its price goes up, the profits of the mining company go up even more, potentially boosting returns.

“The problem at this moment in time, when we’re looking at a corporate sector around the world that is under a lot of stress … you’re taking (on) all that equity risk in a way that you don’t when you buy the underlying asset,” he said.

Exchange-traded commodities (ETCs) are often considered as the next best thing to owning physical gold, said Admans. ETCs are an investment vehicle traded in shares on an exchange, which tracks the underlying pricing index of that commodity.

Meanwhile, funds can combine these different types of exposure to gold, making it “perhaps the best way to a diversified solution,” he said.

This article was first published on CNBC Make It https://www.cnbc.com/2020/04/20/coronavirus-why-gold-is-seen-as-a-safe-haven-investment-in-a-crisis.html?__source=newsletter%7Cmakeit and is republished with its permission.

For more coverage on COVID-19 visit: https://www.cnbcafrica.com/covid-19/

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