'Holding Gold Is Uneconomic For Now,' Says Coutts Investments
(Kitco News) - Nothing threatens gold’s status as a traditional safe-haven investment, not even bitcoin, but holding the yellow metal in the current financial environment is “uneconomic,” said Coutts Investments.
“Gold is … a hedge against both equity market volatility and inflation. While inflation and volatility are rising we believe that the prospect for risk assets is positive, and inflation and interest rates are likely to remain at levels where holding gold is uneconomic for now,” Coutts said in a note published on Monday.
The wealth management firm pointed out that even though inflation is accelerating its pace, real interest rates are not dropping dramatically as central banks are pursuing monetary policy tightening.
“The main trigger for investors to buy gold appears to be sharp falls in ‘real’ interest rates, usually as a result of sudden rises in inflation. The ‘real’ interest rate equals the government base rate minus the rate of inflation and reflects the real return on money held as cash,” the note said. “Sudden spikes in inflation are also associated with the types of economic disturbance that can increase equity market volatility.”
The key point for Coutts is that it does not see “any imminent risk” of another financial crash: “We don’t believe we’re going to see substantially negative real rates for some time and don’t see a compelling case to add gold to portfolios.”
At present, gold prices are largely driven by investor demand rather than supply or jewellery and industry demand.
“Market volatility is higher than the recent past and inflation is on the rise, so it’s not surprising that gold is appearing on investors’ radars once again. At Coutts, however, we don’t currently hold any gold in our portfolios and don’t think it’s time to turn to it just yet,” according to the note.
Despite not being the biggest fan of gold, Coutts is confident that the precious metal’s reputation as a hedge against instability remains not only intact, but also unparalleled by any other asset class, including the new cryptocurrencies.
“Similarities certainly make a compelling case for bitcoin – or perhaps another cryptocurrency – as a store of value, there are some key differences that make us wary,” according to Coutts.
Gold has thousands of years of history that define it as a store of value. It is also a physical metal that can be touched and safely stored.
“[Gold] is a real asset that doesn’t degrade. It also can’t be hacked or have its value manipulated, unlike electronic currencies,” the note added. “Cryptocurrencies have also proven to be very volatile. While this remains a characteristic of cryptocurrencies, the dominance of old fashioned gold in the safe haven space seems assured for the foreseeable future.”