Die Hard: With A Pension

The clocks have gone back, the adverts have started to appear on TV, and the chocolates are now on the shelves. It’s that time of year again. The time of year when the debate starts about whether Die Hard is a Christmas film or not. But let’s not get into that (It is!)

In addition to watching the original film with your Quality Street this Christmas, perhaps also enjoy the third film in the franchise, Die Hard (with a Vengeance). In this film Simon Gruber, Jeremy Irons’ character, steals $140bn of gold bullion from the New York Federal Reserve but is of course thwarted by John McClane (Bruce Willis) and his reluctant partner, played by Samuel L Jackson.

Obviously, $140bn is a LOT of money, but that was back in 1995 when the gold price was $380/oz. Gold prices are now nearly $2,000/oz, so in today’s value the take from the heist would be about $730bn.

If the film was remade today I am sure the plot would involve trying to steal a hard drive of Bitcoin, and Bruce Willis would work in compliance, but it doesn’t quite have the same cinematic effect as thieves loading up 14 dump trucks with 11,000 tons of gold bars.

This is the appeal of gold. It’s a physical asset that has been used as a store of value for centuries. In times of higher inflation or political, economic and social instability gold holds its value. This is because gold is virtually indestructible, almost all of the gold ever mined still exists today, yet it is still a relatively rare commodity (you could store all of the world’s gold within Wimbledon center court).

One of the downsides of holding gold is that it produces no income, so you only make money by selling it for more than you paid. Therefore you would typically expect it to perform poorly when interest rates and bond yields are rising. Yet this hasn’t happened over the last year. There are a number of reasons for this but three main reasons stand out. 1) concerns over recessions in western economies, 2) loss of investor appetite for government bonds as a safe haven, and 3) the reducing role of the US dollar in global trade.

If the global economy goes into a recession, or should there be another shock in the financial system such as Silicon Valley Bank in US or the ‘mini budget’ in the UK, then central banks may be forced to once again step in and pump money into the market. Equally, if investors feel that central banks are not winning the battle against inflation in combination with a recession, then holding an asset that keeps its value in portfolios makes a lot of sense.

Historically, excess money growth in China was invested in the domestic real estate market and/or US treasuries, but this has not been the case over the last year or so. Given the poor performance of the Chinese stock market the money has not flowed there either. So where is the money going? China has certainly been buying up a lot of oil, but gold has also been a beneficiary of this trend.

We are increasingly seeing trade being conducted across various emerging market countries in local currency rather than dollars and other western currencies, meaning that there is less need to hold these currencies as working capital. Companies and governments will continue to diversify their reserves and it’s not too big a stretch to imagine that some of this money will find its way to gold.

**Just a side note, Bitcoin is up about 60% over the last year and is benefitting from some of the same market dynamics. Digital currencies are definitely an interesting asset class for the future but it is still a little early for us to invest in portfolios, but we are keeping an eye on it.

The annual return of gold since Die Hard was released is about 6.1%, which is reasonable, its about the same as bonds but much less than equities. But that doesn’t tell the whole story. Virtually all of that return came in a ten year period in the 2000’s, and if you bought gold in 2011 you will have only just started to see any profit. In fact there have only really been two decades gold prices have soared, the 1970’s and the 2000’s. In both these periods the ‘trend was your friend’, and the optimum strategy was to buy in and hold on until momentum changed.

Gold has been trading in a range for the last 3 years, but given that we could be entering a multi-year inflationary environment plus the current heightened geopolitical risk, investors are once again seeking out precious metals as a safe haven. If central banks are done raising interest rates, which in itself should be supportive of gold prices, US Treasuries are losing their appeal as a safe haven (see our previous article The Pretender), and the reducing role of the dollar this could be an attractive entry point to add gold to our portfolios…. or steal it from the Federal Reserve, if that’s more your style!


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