Famous investor Warren Buffett is noted for his dislike of gold, having said: “It doesn’t do anything but sit there and look at you”.
A Currency Of Last Resort
Try telling that to global investors, who have piled into gold leading to a seven-year high of around $1,745 in recent days. The reason for the rise in gold is simple. While gold doesn’t produce, unlike companies, it is a historically established store of value; a ‘currency of last resort’.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
Investors fear such a store of value will be required to protect wealth from global central banks, which have embarked on an unprecedented package of low-interest rates and monetary easing to support economies fighting the deep recession caused by Covid-19.
While these policies may be needed to restart economies ravaged by the pandemic, drastically increasing the amount of money via quantitative easing will likely cause inflation when economies rebound to normal levels of activity. This inflation will of course benefit Governments which have run-up huge debts fighting Covid-19, as the value of these debts will be inflated away.
The Impact Of An Inflationary Spike
By contrast, inflation acts as a tax on any investors holding cash. Organisations and individuals who have sensibly put aside money will see the value of their savings fall in the event of an inflationary spike. There is, of course, no guarantee inflation will lead to permanent growth, leaving business owners and individuals with the fear of a stagnant economy and rising prices.
Given the risks of holding cash, investors have been forced to invest in ever riskier assets. To take one example, equity markets look ‘priced to perfection’, after a miraculous rebound from significant sell-offs in March and April after the initial economic shock of Covid-19. With stocks and almost everything else looking highly-priced, it is arguably sensible not just to hold gold as an inflation hedge, but also because of its lack of correlation to other asset classes.
Despite gold’s function as a diversifier and hedge against inflation, most small businesses do not think about investing in bullion. If a business is in the fortunate position to invest, owners will often look to upgrading equipment, or invest in the property the business operates from. Others simply distribute profits to shareholders; an unwise short-term approach given the number of risks on the horizon.
Investing In Gold
So, while investing in gold may seem counterintuitive, I believe there is a strong case for more small companies to diversify their holdings by investing in gold. Take my company which designs and manufactures exhibition stands for large conferences, as an example. In September 2015 the company began investing in gold with a £3,000 initial investment. Over five years we have increased our investment to £114,000, yielding a total return of £59,000.
Having bought the industrial unit we operate from, as well as upgrading our machinery, our additional investment in gold has not only generated a significant return, but also protected our reserves from the future risk of inflation.
Like most other companies in our industry, the business has been challenged by Covid-19. In this environment having ample liquidity is key to navigate the crisis to emerge stronger from Covid-19. Looking ahead to a difficult market for the coming year, because of the decision to invest in gold we well-positioned, regardless of whether inflation takes off without growth.
For a small business looking to preserve capital, it makes sense to be as diversified as possible. With a very real risk of inflation in the coming years, business owners should also consider whether a holding in gold is appropriate for your business.
About the Author
Alan Jenkins is the founder and CEO of Quadrant2Design an exhibition design and manufacture contractor that operates throughout the United Kingdom and Europe.