Editor's letter

Gold proves its worth

The pandemic has been good for gold. And, while you must keep holding gold (inflation is coming), you must not ignore the return of our old lives, says Merryn Somerset Webb.

We’ve been boring MoneyWeek readers for years about the importance of holding gold. It should have, I said in 2002, a natural place in your portfolio as a “financial hedge in troubled times”. It was trading at $320 an ounce then. It’s now around $1,950. Not bad for what the naysayers dismiss as a “pet rock”. You’ll have things in your portfolio that have made you more in the last 18 years. But gold has certainly proved its worth in these troubled times. Will it go higher? 

You don’t have to look far to see why it might. There is Covid-19 itself, and the possibility of the much-discussed second wave which Boris Johnson thinks he sees signs of in Europe. There is the response to the virus – the quarantines and restrictions that will limit some activity and prompt yet more monetary and fiscal stimulus. Then there is the US election (95 days to go). The polls show Joe Biden in the lead and if the level of global stimulus already makes you nervous about the integrity of fiat money (should you believe it still has any), his pure printing-financed plans for a $7trn spending package should make you really nervous. Biden’s policies will take us all a giant step closer to the monetary end game that finally disconnects spending from any pretence of reality. Add to this the fact that the opportunity cost of holding gold as insurance against misery and inflation has fallen (nothing else has a yield either) and it is hard to be surprised by its rising price.

But before you rush out to go 100% gold, remember a few things. First, diversify your insurance (oil is also an excellent inflation hedge). Second, nothing goes up in a straight line. Don’t expect gold to. Third, gold is about “abnormal” – and some “normal” is returning fast. What Johnson is seeing in Europe is less a second wave than a localised post-lockdown inevitability. In the US, cases are now falling: deaths should, say Pantheon Macroeconomics, peak by mid-August. Note too that the response to new cases cannot be lockdowns of the type already seen (see this week's magazine for how the “flaws in, panic out” models forced horrible policy mistakes). So life (and economic activity) will continue to return to normal. Just look around you. My local outdoor shops are sold out of almost everything (no bikes, paddleboards or wetsuits). There is a rush on haircuts (I notice rising prices – let me know if you do too). This week I got caught in my first real traffic jam (I was thrilled) and had several calls with people who are “in the office”. How’s that for normal?

You must keep holding gold (inflation is coming); but you must not ignore the return of our old lives. With that in mind, if home working is an overdone idea, commercial property trusts might be cheap. They aren’t alone, says Matthew Lynn this week. There is opportunity in this crisis – CEOs and investors who are brave enough to look for real value now will be well rewarded. It might sometimes seem that only a few overpriced tech stocks will ever make money again. It isn’t so. Finally, if you have fallen for the idea that there is something particularly awful about the UK’s Covid-19 response, some good news. It seems that when it comes to medical innovation – the bit that really matters for the long run – the UK has not trailed but led the world. Perhaps invest in that too.

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