Investment

Investors flee to gold – the Russians were doing it at least six months ago

Russian minister of finance, Anton Siluanov, gave the game away in June by revealing that the country’s National Wealth Fund had raised its gold weighting to 20%.

As part of the strategy, the fund, which pays state pensions, dumped the dollar and halved its sterling exposure, while shifting towards the euro and China’s yuan. 

Gold is likely to rise further, possibly much, much further, following Vladimir Putin’s decision to move troops into Ukraine

The Russian central bank has also been a gold bug along with Kazakhstan, Uzbekistan, Poland and Hungary. Total central bank reserves have risen to levels not seen since 1990.

Partly due to fears of war, Russia’s gold bet is starting to come good following this year’s price rise which takes it to $1,900 an ounce, around an eight-year high. 

US traders have been selling puts on Nasdaq to buy gold futures out to May. A year ago, the trade would have been the other way round. Direct Bullion is only taking gold orders by phone, rather than online, blaming exceptional demand. 

Gold is likely to rise further, possibly much, much further, following Putin’s decision to move troops into Ukraine.

Pressure is also building, as a result of rising inflation capable of undermining the value of a range of fiat currencies. The US Federal Reserve has talked of fighting rising prices by raising interest rates and making credit more expensive.

But gold provider Glint Pay points out that interest rates of 10.5% are needed to knock inflation on the head, according to the Taylor rule, developed by US economist John Taylor. But the Fed will be lucky to get to 1.25% given economic uncertainties, mid-term elections and Ukraine. 

Gold does not pay an income and does not generally perform well in inflationary periods when central banks raise rates sufficiently high to choke it off. This time around, the Fed will be behind the curve, providing gold with a chance to shine.

War will provide gold with further momentum, because the yellow metal is generally perceived as an investment least likely to destroy your capital in times of war.

The metal is durable and attractive. It has underpinned warring civilisations for thousands of years. Gold coins minted in 600 BC have been discovered in Turkey.

Gold crosses borders, and maintain its lustre. Gold from South America financed the Spanish empire. The UK built its banking system by using a gold standard for sterling. Members of the German Nazi party stored the metal underground, and in the banking vaults of Switzerland, for future use.

These narratives, and many others, have reinforced gold’s reputation. But it can be hard to keep up with events.

Back in 1814, Nathan Rothschild put down a massive bet on gold to provide finance for UK military expenditure, following Napoleon’s escape from Elba. 

Rothschild faced calamity a year later, on receiving advanced news by courier of Napolean’s sudden defeat at Waterloo, which would dish the price of gold.

But he kept his nerve, and methodically switched his portfolio from gold to government bonds. He ignored pleas from his family to sell, as the price of bonds marched higher. In 1817, he finally sold them to show a gain of 40%, and a profit of £600 million, in today’s money. Other investment coups followed, making the Rothschild family one of the richest in Europe.

Envious rivals questioned Nathan Rothschild’s methods. But historian Niall Ferguson points out it was the family’s capital base and information network which helped him make the right investment calls. 

So far this year, the price of gold has risen 4.2%. US bonds are off 3.5%. Large-cap value stocks with strong balance sheets have fallen 5%. Their growth equivalents are down 15%. Speculative growth stocks and cryptocurrencies have fallen 30%, or more. The price of oil has gained 17.5% to $91. 

At the start of this year, former Morgan Stanley strategist Byron Wien forecast oil at $100 and a revival of gold as a haven for newly-minted billionaires.

And, so far, he’s on the money. But a meaningful bet on wars and inflation is a massive call for any family office – even if it happens to be run by a Rothschild. 

Some say the economy will snap back in six months. Others say we are heading for a new Cuban missile crisis. The between war and peace is binary. The market is stuck in a holding pattern, as people agonise over the most likely outcome. But Anton Siluanov could have made the right call.

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