‘Why do you invest in gold, when it doesn’t pay interest?’ This is one of the most frequently asked questions when it comes to gold investment discussions.
Gold may not pay interest but neither, it seems, do the banks.
Today the Bank of England’s MPC met for their monthly bank-rate setting meeting. This was the 60th meeting since they first set rates at the record low of 0.5%, five years ago.
Savers’ campaign group Save Our Savers estimates that since the first rate cut to 0.5% on the 5th March 2009, savers have lost ‘a staggering £326 billion.’
Thanks to these record low rates and highly inflationary policies, the loss in savings is worth £5,123 per ‘man, woman and child in Britain.’
Many of the decisions made by the MPC in recent years have apparently been in an attempt to boost consumer spending. According to Save Our Savers, they have only had a derogatory effect. Two-thirds of the UK economy is dependent on consumer spending, however the £110bn taken from UK households thanks to low interest rates, means the economy has lost out on a hefty boost.
With all the talk of encouraging consumer spending and boosting house-prices, one would think that savings were derogatory for an economy. In fact one would think that savers were being deliberately punished for saving, given the fact that since the cutting of rates they have lost on average £4,200 per year (for a £100,000 of savings) whilst a borrower with a £100,000 mortgage has gained £3,200 a year.
Hearing figures such as these makes one wonder how to best diversify their savings so that they are protected from not only central banks’ decisions but also government policy, geopolitical events and any other developments that affect asset classes.
As we have consistently shown, gold acts as a safe-haven and hedge against inflation. Unlike the money literally disappearing from a saver’s bank account, gold cannot be slowly leaked out of your account thanks to government policy.
Savings are supposed to act as a form of insurance, they’re not just a pot for rainy day. In a similar vein of thought, we suggest that people invest in gold as an insurance. Had that £100,000, mentioned previously, been invested in gold back in March 2009, it would now be worth £114,213.
Gold versus cash savings
About a year ago we brought you a fantastic infographic outlining the pros and cons of investing in gold rather than holding cash.
As we pitched gold against cash savings, it was clear that the yellow metal was able to offer a significant amount more in terms of security and as the ultimate place for savings.
Whilst gold is not protected by government guarantee and offers no yield, it acts as a hedge against the factors that most threaten the value of cash savings, namely deflation and inflation, acceptance in other currency areas, and it protects against credit default risk.
Some fear that the gold price will decline should interest rates climb. Firstly, we think that an increase in real interest rates will not happen for some time. But, secondly (and most importantly) a rise in interest rates does not mean a fall in the gold price. Whilst gold returns do tend to be lower when interest rates are between 0% and 4% than when rates are negative, it’s not as though gold trends lower.
Interest rates also play a key role in how gold will react to changes in inflation Professor Brian Lucey, Jonathan A. Batten and Cetin Ciner, concluded in a paper entitled ‘On the Economic Determinants of the Gold-Inflation Relation’ the researchers find that ‘both short and long term interest rate changes forecast changes in gold’s inflation beta…[further] the impact is negative and the cumulative impact of interest changes are felt in approximately 6-months.’
Yes savings are important, they are the lifeblood of not only the future of an economy, but also your personal future. This does not mean that you should save in cash to finally access them on a rainy day to find they are worth a mere percentage of their original value. No, protect yourself and your future by putting some of your savings in insurance and invest in gold.