If the events of 2020 have taught us anything, it’s that nothing is certain. While there may be more hope for 2021, hope can’t protect your assets from the volatility that is yet to come. Where the stock market has taken a battering and the property market is running on borrowed time, gold has resolutely weathered the COVID-19 storm. If you have investments in the bank, stocks or the property market, now is the time to consider gold as a hedge against potential asset erosion or market declines.
Global stock markets
Global stock markets have been through the mill over the last ten months. The initial coronavirus outbreak and subsequent mass lockdowns around the world sent all markets plunging and there followed many months of intense volatility.
In the UK, the FTSE 100 ended the year down 14%, having recovered somewhat from the initial pandemic slide but still a long way off where it was before the outbreak. Vaccine news has been a particular boon, although the logistics of a nationwide program have proven tricky. It’s going to take longer than a few months to vaccinate enough people to minimise the spread and open the economy back up fully.
What is a very real unknown is the speed and outcome of the virus mutations. All the later iterations have been more infectious than previous versions of the virus, and the outcome has been a third nationwide lockdown which makes a double dip recession a near certainty.
The US stock markets appear to be even more precarious. Instead of building back up to full strength in a slow steady climb of positive corporate and economic news, US share prices have raced beyond their pre-COVID levels, and the cries of ‘bubble’ are becoming louder as the market has risen despite the virus ravaging vast swathes of the country.
Led by buoyant tech stocks, the S&P 500 actually ended 2020 16% higher than it started despite a mid-March crash and no end to the virus. The debate now is whether the bubble will burst or deflate. Either way, the outlook for the US stock market is bleak.
While stock markets are busy pricing in a big upswing in economic activity once the virus is finally under control, it is not clear when that might happen, nor whether the fallout of the lockdowns will temper any recovery. The third January lockdown prompted the extension of the furlough scheme, kicking the can down the road for companies that just won’t be able to rebuild their business after such a devastating year.
Deloitte downgraded its UK economic forecasts for the first quarter in response to the new lockdown restrictions, and their outlook is for 2021 growth of just 2.6%, after a fall in 2020 of over 11%. The squeeze isn’t yet over.
Property investment: safe as houses?
The property market in the UK has had an unexpectedly easy ride through the coronavirus. Despite the entire market shutting down for around three months during the initial outbreak, the hiatus stored up demand which was expended when the market opened again. This resurgence was boosted by the stamp duty holiday announced in July which has incentivised buyers and sellers to move while they can save thousands on their property transaction.
The problem is that the stamp duty holiday is due to end on March 31, 2021, and the furlough scheme will conclude shortly after that. These dual pressures are expected to depress the buoyancy that has been evident in the property market for the last several months.
The Royal Institution of Chartered Surveyors (RICS) survey, published in mid-January, said the property market was already seeing signs of a softening. This indicator has added weight considering the stamp duty holiday should be impelling buyers and sellers to get their transactions completed before it runs out. “Near-term sales expectations slipped further to post a net balance of -22% across the UK and is the weakest since April 2020”, the survey said.
Like the stock market in the US, the performance of the property market in the UK is at odds with the volatile economic circumstances around it. And there is growing concern about how long the dissonance can continue. Britain’s biggest lender, Halifax, forecasts a drop of up to 5% in property prices in 2021 as rising unemployment and the end of the stamp duty holiday finally catch up with the housing market.
It may seem a relatively safe place to keep your money, but cash in the bank at the moment is not a savvy investment. Interest rates are lower than they’ve ever been in history, and the Bank of England is even contemplating negative interest rates.
While inflation is low, at 0.6% in the most recent November inflation data, this is still higher than the 0.1% Bank of England base rate, and higher than most high street bank deposit interest rates. This means any money in the bank will be losing value as inflation grows quicker than the interest it is earning.
The price of investment grade gold bullion and gold coins has risen steadily over the last several decades, climbing over 400% in the previous 15 years. In 2020, the value of gold rose over 20%, spurred by the extreme uncertainty of the COVID-19 pandemic and the economic devastation of the lockdowns.
The expectation that 2021 would start with more certainty and less disruption has already been shattered, as a third national lockdown and new virulent strains of the coronavirus have dampened that hope. While the vaccine rollout is perhaps the best hope yet of at least some of the restrictions being eased, it is not a silver bullet.
The legacy of the virus will live for decades in the colossal debt the government will need to pay down. In December, UK government borrowing debt stood at £2.1 trillion, a record outside of wartime, and this was before the extended furlough scheme was pushed through to April. This will lead to inevitable tax rises and spending cuts to service recent government spending debt.
Meanwhile, the end of the various government support schemes will lead to many more job losses, and this will have an impact on the property market as well as on wider economic activity. All of this will most likely impact the ability of the stock market to recover.
Investment gold bought to hedge against these possible market declines could serve a dual purpose. Gold thrives on uncertainty and if as some analysts expect, the value continues to rise, investors can enjoy the gains made before liquidating the gold to buy up stock or property assets when the market is lower. Hedging your bets on gold may prove especially lucrative.