Thank you to Justin Urquhart Stewart, and Regionally, for allowing us to share these weekly columns with the London Investor Show network. To find out more about Regionally, you can meet them on their stand at the London Investor Show – Stand No E4.

4th September 2020: All that Glisters is not Gold

All that glisters is not gold?

My thanks to William Shakespeare for such a useful and timeless phrase, for some people have an idea that the only thing that “glisters” is gold. There is a specialist breed of investors called ‘goldbugs’, who at the slightest hint of the mention of the metal will hector and harangue anyone who criticizes its worth. Some will tell you that it has retained its value since the days of Cleopatra, which means little to those of us who were not around at the time, and unless I can find the financial diary of the somewhat unfortunate asp who assisted her demise, we can know little of its value back then.

I personally have never especially liked investing in gold as I find its investment attraction somewhat binary, in that the price just goes up or down and there is little other benefit (apart from possibly the comfort of holding it in an Ebenezer Scrooge-like manner). Now if you are a lively trader with eyes trained on your Bloomberg screen every waking hour, then I can appreciate the opportunity. However, for those of us with a somewhat broader view than the professional traders (or without their experience), other assets can be a lot more attractive.

Take shares for example. They too go up and down in price, but you will also have the chance of earning a yield from them by way of dividends. In fact, for most of us, such seemingly inconsequential dividends are a vital component of our pensions. And good pension managers (and investment managers) really should not be focusing on trading their portfolios the entire time. This merely makes stockbrokers wealthier via their commissions (covert or not) and can result in greater risks to the investor as they have to make up the difference between the buying and selling prices – the spreads. There are times when such spreads are very substantial, especially with smaller companies – more spreads than a fish paste manufacturer.

No, a key part of longer-term investing is the compounding of the share dividends over time. And through application of the old ‘Rule of 72’ (which I have written about in a previous article here), they can establish at what speed the value of those investments will grow.

So back to the glistening one. Why then should we bother with this treasured metal? Well, for most investors it is probably when everything else is looking very unappealing. Most portfolio managers will say that they may hold five per cent of their portfolio in gold as a base cover if everything else goes horribly wrong, although, if it does happen, then in reality a holding of just five per cent will not exactly save your finances.

However, let’s look at our more recent situation. We had been seeing a recovering global economy since the banking crisis in 2008, and although we were in fact heading for a quite appreciable economic slowdown, or even recession, confidence levels were generally pretty positive.

This was actually quite remarkable considering the concerted efforts by central bankers to buy their way out of the crisis. This was Quantitative Easing (QE), whereby governments could in effect create and buy their own debt. This financial sleight of hand has proved successful at least for the moment. In effect it was a trick of confidence, although the detractors would say it was closer to a confidence trick that will eventually be rumbled.

So, government debt levels rocketed to such an extent that in many cases, including the UK, the largest owner of its debt was the government itself. Still, many in the investment world breathed a sigh of relief that it had worked, saying, “well I hope we won’t have to do that again because we couldn’t afford it”. So, as long as there was not another crisis, we would be alright. Oh dear....

Then the global economy was hit by Covid-19 and the effect was in effect a form of economic coronary heart attack. As of yet (at the time of writing), there is no known cure or vaccine for the virus, and neither is there an immediate financial one for the economies. The leading share markets fell off a cliff reflecting the almost immediate recession in countries worldwide, and as governments took supportive action, more government bonds were sold, printed and bought. So, QE had returned, except on an even greater level.

By the end of March, stock markets had fallen dramatically, and bond markets were awash with new ‘paper’. The economic details started to come through showing, as any heart monitor would, that the pulse was both erratic and slow. So, with stocks looking uncertain, bonds unattractive and interest levels turning actually negative in some cases and often less than the rate of inflation, what is left to invest in that you could trust? Add to that, a US President developing a trade war with China, and confidence levels become extremely low.

For the optimists, the stock markets were offering a ‘spring sale’ of discounted share prices, and to date, their recovery has been remarkable, but that was a decision for the brave and the experienced to take. For others, what better time was there to turn to gold, and since then the price has risen by 30 per cent? However, a word of caution here for those of us not in US dollars, as any movement here will obviously affect the value of our personal holdings. Fortunately, so far, the dollar has fallen against the pound and has thus enhanced our gain, but any reversal of this will obviously have the opposite effect.

So, is it too late to benefit from this situation? I would say no. As we enter the season of storms, both meteorological as well as financial, we may see another fall off in share values. If this does occur then a similar crisis of confidence may well occur, and those goldbugs will again be happy. We should then consider joining them - at least for the moment.

And finally... time for some proper discipline with your leash!

Order and control are often seen as a national trait of the German people. This is to overlook their creation of some of the finest art, music and culture in the world. However, on occasion there are some of our Teutonic chums who seem happy to revert to their more orderly characteristics.

This was perfectly illustrated recently by the actions of Agriculture Minister Julia Kloeckner, who has unleashed a fierce argument over the control and handling of Germany’s 9.4million canines. She announced this week that she had taken expert advice and was thus introducing a law to ensure dogs must go for a walk or run in the garden at least twice a day for a total of an hour.

“Pets are not cuddly toys - their needs have to be considered,” said Kloeckner, adding that pets must get sufficient exercise and not be left alone for too long. Presumably they will also shortly be getting the vote.

With almost one in five German homes owning a hound, the new ‘Animal Welfare Dog Regulation’ affects a significant proportion of the population, although a large number have already said the rules were somewhat ruff.

“Compulsory Walkies for Dog Owners? Rubbish!” wrote the top-selling ‘Pup-arappzi’ newspaper Bild.

Then there is the question of enforcement. The ministry has said that the 16 federal states will be responsible for enforcing the rule and hounding out offenders.

Is she mad? No, but probably just three stops short of Dagenham (Barking, on London’s District Line in case you didn’t know...).

Have a good weekend.
Justin