Owning and investing in the yellow metal is becoming more mainstream, a reflection of economic uncertainties as well as changing awareness of its uses in portfolio diversification.

More than four years’ ago, when the price of gold rose over $1,900 per ounce amid fears the eurozone could crack up, those who had been mocked for their love of the yellow metal would have been forgiven for exhibiting schadenfreude. Any crowing stopped fairly fast, however, because the prospect that the US would turn off the monetary taps knocked gold off its perch.

But since the turn of this year, gold has staged something of a resurgence, even though it is off its highs for this year (it increased to more than $1,300 per ounce on 2 May – source: BullionVault). Pictet, the Swiss private bank, told this publication recently that it has become sufficiently worried about a decelerating Chinese economy, and inflationary effects from heavy quantitative easing in certain countries, to think about moving into gold. After futures markets were bearish of gold at the end of 2015, they have shifted towards a net bullish stance as late as last month. Worries about Brexit, the prospect of Donald Trump or Hillary Clinton in the White House (neither seem to be very positive if one values free markets), geopolitical tensions and top-heavy US stock markets have put gold back in play.

One marker that gold is attracting private investors comes in the form of Sharps Pixley, a firm that is part of Germany’s Degussa Group and which recently opened a showroom in London’s fashionable St James’s Street, complete with a facility for buying/selling gold and for storing it in deposit boxes. The business aims to push against the cliché that only mega-rich investors, central banks and corporations buy or sell gold. In the words of Ross Norman, chief executive of Sharps Pixley’s facility, this business wants to “democratise” ownership of gold. To some degree the arrival of such a business represents a case of money turning full circle in a country such as the UK, which for years has seen gold relegated to a minority or eccentric pursuit. That appears to be changing.

WealthBriefing recently visited the elegant Sharps Pixley showroom. Gold jewellery, objets d’art and gold-made wristwatches adorn the presentation cabinets; there is also a see-through display – well-locked – of gold bars in various sizes, such as a 1 ounce bar, a 100 gram ingot, 250 gram ingot and a 1,000 gram ingot (all are 99.99 per cent pure). Investors can also buy gold coins, such as a 1 ounce South African Krugerrand, a Canadian Maple Leaf coin of the same weight, a gold “Chinese Panda” coin, and a 20 Swiss Francs Vreneli, among others. There are also US and UK gold coins. Besides gold, there are examples in the shop of 1 ounce silver bars. Clients can, once providing certain identifications, set up an account. Even though not fully regulated by the Financial Conduct Authority, Norman says his professional reputation as a director is always at stake in accepting business, so normal common sense applies before signing up a customer. His firm doesn’t accept US clients because of their heavy compliance burdens under FATCA and other regulations. Purchases of gold kilobars carry a 1.5 per cent charge; no value-added tax or other duties apply. A safe deposit box at the centre costs £250 ($361) per annum.

So what is going on here? The showroom/facility is a way to overcome what Norman said is a “sense of disbelief” amongst the public that one can buy and invest in gold relatively easily. Walking into a gold depository is not something from an Ian Fleming novel. “The challenge is a bit of a cultural one. We have had a long period of stability [in the West] and the role of gold is not something that everyone gets,” Norman said.

There is no such thing as a typical client, Norman said. “We get lots of women, young people and all nationalities. Perceptions have completely changed. We are democratising investments,” he said.
“With gold, you buy it as an insurance policy for the long term and hope that you don’t actually make money on it,” he said, tackling the point that as pure money, gold doesn’t generate interest, as in a cash deposit in a bank operating under fractional ownership where a person depositing money is in fact a creditor.

Negative real interest in several countries (Switzerland, Japan and Denmark), and the risk that such rates could take hold elsewhere, partly explain the current “war on cash” in some countries, Norman said, pointing to examples of how people are being encouraged by policymakers to hold less cash.

Ironically enough, if gold is really as outdated as some commentators claim, then central banks haven’t got the memo – China, for example, has been a significant gold buyer. Former UK finance minister and premier Gordon Brown will never fully live down the fact that he sold much of the UK’s gold reserves in the late 90s/early Noughties at a fraction of its current price.

James Rickards, author of books bearing catchy titles such as Currency Wars and The Death of Money, has a new book out extolling gold and warning of what he sees as an unsustainable run of central bank experimentation (his book, The New Case for Gold, was reviewed by this publication recently here.) A few years’ earlier, Detlev Schlichter, an investment professional working in London, took some time away from the City to pen Paper Monetary Collapse, also arguing that gold was no “barbarous relic” but instead an essential basis for sound money. And while some gold enthusiasts can be prone to conspiracies, what is notable about such men is that they often have worked in established, conventional fields, only to have become alarmed at what they see unfolding. In Switzerland, Singapore and Luxembourg, there has been the rise of the “Freeport” depository business model, playing to demand for storage of hard assets such as gold and fine art. 

Gold has its critics, however. JM Keynes, the famous 20th Century economist, once famously called the post-WW1 gold standard a barbarous relic and the UK's return to this standard in the mid-1920s – when Winston Churchill was finance minister – has been widely seen as a serious deflationary error. After it played a role in anchoring the Bretton Woods monetary order following the Second World War, the then US president Richard Nixon ended the gold window for the dollar in 1971 as the US was hit by the strains of Vietnam and rising Federal debt. 

It is also necessary to point out that gold produces no yield – it has hardly any uses in industrial production – and does not always show low correlations with other asset classes that diversifiers might seek. (Defenders of gold say its lack of yield is precisely because it has no risk.) During the initial phases of the 2008 financial meltdown, gold got slammed as investors sought to raise cash from hard assets to meet their obligations. Gold is also volatile at times, and there is always the risk that if gold does become very popular during a period of great strain, governments might try to seize it, much as F D Roosevelt’s US administration did in the 1930s. (Rickards argues this will not be easily repeated because people tended to be more trusting of government back then than they are now.) Gold has its own risks, and other forms of non-state money are vying for attention, such as Bitcoin, the digital currency that has caused controversy and interest in recent years.

Business opportunities
The crop of businesses set up in the UK to play to private investors' enthusiasm for gold continues. A few years’ ago, The Real Asset Company, a UK business set up to enable investing in physical gold, was created. BullionVault, another firm enabling trading and investment in physical precious metals, has thousands of clients and regularly publishes data that is sometimes cited by this publication. Adrian Ash, who is head of research at this firm, points to some sharp changes in sentiment towards gold recently. 

“As a measure of a dramatic switch from bearish to bullish sentiment in the market, data from the US COMEX exchange show that net long positions equated to 702 tonnes a week ago, as measured by futures and options positions, versus a net short stance equating to 42 tonnes at the start of the year. Over the long term, positions have been a net long of 361 tonnes,” Ash said in a phone call.

The uncertainties around central bank policy, and the sense that after last December's Fed rate hike, chairperson Janet Yellen was in a quandary, while the Bank of Japan was engaging in further heavy QE, have spooked investors, benefiting gold, he said. "Gold tends to do very well when people lose confidence in central banks,” he said.

In the more recent upswing in gold buying, there have been allocation shifts to gold from "real money" sources at the expense of some other assets, while another force has been buying of about 371 tonnes of gold by exchange traded funds providers to back the increased volume of ETF shares, Ash added. His arguments are corroborated by recent data from the World Gold Council, the industry group, which recently reported a rise in gold demand in a quarterly report (see here). 

Gold has been in use as a medium of exchange for about as long as human civilisation has been in existence. Ross Norman at Sharps Pixley and other firms in this space are confident that this metal has plenty of life yet.