Coronavirus crisis and inflation fears keep fuelling the gold rush

“Gold does nothing, it doesn’t even rust.” The statement was rather startling considering it came from Adrian Ash, the director of research at Bullion Vault. His employer is, after all, a company whose business is to allow private investors to purchase directly from professional precious metal markets and then store their acquisitions – including 44.3 tonnes of gold.

Gold does indeed have little practical use beyond ornamentation and a few industrial applications. Yet in times of crisis people can’t seem to resist turning to the metal. Even as the coronavirus pandemic ravages the global economy, gold prices have soared.

On August 4, its spot price breached $2000 per troy ounce before falling back and breaching the $2000 again on August 18. At the time of writing, gold’s spot price was hovering around the $1990 mark, up about 34% as compared to this time last year.

All this means good business for Bullion Vault. New investors have piled in and daily new account openings are running 226.6% ahead of its prior 5-year average. Over the past 30-days, the average value changing hands has been £12.5 million every day, 424.4% up on 2019’s daily average.

As Ash observed: “Useless very much does not mean valueless.”

Indeed, gold’s very uselessness may have contributed to its value early in the pandemic. As businesses and factories shuttered, stock and commodity prices crashed, with oil even dipping below $0. Gold, an asset whose value was not dependent on wider economic activity, became more attractive.

However, despite stocks and commodity prices recovering from their nadir in March and April, the price of gold has continued to rise. That it has done so suggests wider worries about the potentially depreciating value of other assets.

Ash cited two key issues driving the gold price : inflation worries and ultra-low real interest rates.

On the former, investors have been spooked by recent comments from the chair of the Federal Reserve, Jerome Powell, who said that the Fed will now let inflation run above 2% “for some time” in order to make up for periods when inflation sat below this benchmark. Still, many are sceptical of whether this can be managed, given Japan and the Eurozone’s long-standing failure to achieve this goal.

More important was the second part of the statement, that this more relaxed approach to inflation would mean a long period of low interest rates, and its implications for the bond market. In May this year, the UK sold its first negative-yielding bonds, which means that investors will receive less than their original investment when the bonds mature. In practise the real yields on bonds, the returns expected once inflation is considered, has long been negative in the UK as well Japan and the Eurozone.

Now real yields on US Treasuries have tipped negative. They dipped below -1% at the end of July and and have been stuck in that area since then. Anxiety about the state of the US economy, as coronavirus rips through the country and stimulus talks stall, has left investors literally willing to lose money for the privilege of owning a safe asset.

The situation suggests persistent anxiety about the stock-market as well. Theoretically, all is well with US stock markets which have almost recovered to their pre-pandemic highs. This is partly due to booming stocks in tech companies – which makes sense. But is also partly due to the Federal Reserve’s massive programme of buying corporate debt in companies that would otherwise be devastated by the pandemic.

While this may well have helped stabilise the global economy, it also leads to some obvious absurdities. The S&P 500 and Dow Jones have risen relentlessly this month even as the US continues to report eye-watering unemployment figures and Boeing’s share prices have staged a partial recovery even as global travel restrictions remain in place.

All this means gold is gaining a popularity as a hedge against markets which are swiftly catching-up with reality. For the moment, it can yield attractive returns which bonds cannot. The only caveat, according to Ash, is that gold prices tend to be more responsive to interest rates’ direction of travel than the rates in absolute terms – rates will likely have to decline further, not just remain stubbornly low, to cause a major upward shift in prices again.

Still, for the moment buyers now extend outside the usual circle of goldbugs – stereotypically libertarians, or even survivalists, awaiting the collapse of fiat currency and/or society. “Gold is now being refinancialised,” according to Ash.

It is, however, hard to escape the whiff of catastrophism that lurks around the market, especially for small private investors. Ash says one of the key motivator for its clients is that owning gold “gets you off risk for anyone else’s financial survival”.

Bullion Vault’s website emphasises that any precious metals purchased are your outright property isolated from the risk of financial collapse. It also suggests overseas storage of bullion “would be exceptionally good protection” for ethnic minorities or other groups at risk of asset confiscation by unjust governments.

Equally, Ash also provided a great amount of detail on why confiscating money from bank accounts was much easier than seizing gold overseas, and why physically holding gold yourself would be of limited use if you were facing a social collapse like the Russian Revolution.

Indeed, the vast majority of Bullion Vault’s clients do store their purchases with the company and can choose which vault they prefer. It hardly seems a coincidence that, as a result, 72.1% of the gold stored by Bullion is kept in Zurich. Switzerland is, after all, a country famed for its stability and having enough nuclear bunkers to store all of its population and then some.

The rush to gold in crisis does seem to have a phycological element too. As Ash observed “People say gold has no intrinsic value, well nor does anything else. Homo Sapiens are Homo Semantis, we put meaning in stuff and gold has an awful lot of cultural meaning.”

At a time when all that is solid appears to be melting away, you can see why increasing numbers of people are feeling the primal lure of one of the most ancient, persistent, and universal stores of value.