John Stepek says the price of gold is a gauge of investment fear — and there’s a lot of fear around right now
Last week, we had a power cut. It was already pitch-dark outside — not the best time to discover that the children had hidden our only torch. We stumbled about in the dark, before a kindly neighbour gave us some candles and a lighter — just as the power went back on.
It was a useful reminder that you can rely on the modern world to function about 99 per cent of the time, but it’s always worth having an old-fashioned back-up, just in case. When the National Grid cuts out, you want candles in your drawer. When the global financial system starts to wobble, you want good old-fashioned gold in your portfolio.
But why? Gold makes no sense as an investment. The point of most investment assets is that they generate income. The price that a sensible investor is willing to pay for an asset should reflect the amount of future income it is expected to provide. An investment property is supposed to pay the owner a rent — though not always, as many city-centre buy-to-let amateurs are finding to their cost. You buy shares in a company either because it pays a dividend or because you expect it to reach a position where it pays a dividend in the future. Even current accounts (effectively a loan to the bank, as Northern Rock account-holders have learnt rather vividly in recent weeks) pay some minimal level of interest.
Gold doesn’t pay anything. In fact, gold costs the owner money, in the form of charges for storage and insurance. The only possible way to make money from gold is if you can sell it for more than you bought it for.
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