“ALWAYS believe in your soul, you’ve got the power to know, you’re indestructible, always believe in … gold.” 

Spandau Ballet remain convinced, but have investors returned to the conventional norm of viewing gold as a “safe haven” asset? writes Gary Welford of Brewin Dolphin. 

The yellow metal has been one of the best performing assets year to date, generating returns of approximately eight per cent. This is favourable in comparison to the FTSE 100 Index which is down approximately two per cent for the same period.

Gold has been out of favour for a couple of years.

More recently, investors may have viewed that the reduced level of Quantitative Easing, from the US central bank, would lead to a rise in longer dated interest rates, which it has, thus increasing the opportunity costs associated with holding the metal. The price of gold fell approximately 28 per cent during 2013. So what’s changed in quarter one of 2014?

Political tension is certainly one element. The Crimean people voted heavily in favour of leaving the Ukraine to join Russia. The White House responded with a stern line stating they will not recognise a poll where voter behaviour is influenced by the threat of violence.

The political brinkmanship displayed by the Russians continues to unease markets, as they threatened to respond in an equal measure to any impositions placed upon them.

The West swiftly agreed sanctions on Russian and Crimean administrations, restricting their travel and access to assets held offshore, though noticeably these are of minimal direct consequence to economic activity. Given European dependence on Russian energy supplies, however, this will be a very difficult step to take. Leaders continue to remain divided on the severity of further sanctions creating grave uncertainty.

At the turn of the year global equity markets were trading at or near all time highs. Although equity markets are generally not trading on over demanding valuations, psychologically, investors may have been easily persuaded to take funds out of the asset class on the release of any bearish economic growth data.

Prices are driven by the basic economic concept of supply and demand. So who has been buying gold? In February we learned, via the Hong Kong Census and Statistics Department, that China’s net imports of gold totalled 109.2 tonnes in February, 30 per cent up on the previous month and 79.3 per cent up from February 2013. The imported gold bullion is largely being used as collateral for loans due to a worsening credit environment within the country.

Global growth and risk concerns appear to have investors recognising gold’s use as a risk hedge. If we add to this a potential increase in consumer demand, i.e. Mr & Mrs Smith popping into H Samuels to pick up a relatively low priced 18 carrot gold necklace, then perhaps Spandau Ballet may be onto something?

The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd. No Director, representative or employee of Brewin Dolphin Ltd accepts liability for any direct or consequential loss arising from the use of this document or its contents. Any tax allowances or thresholds mentioned are based on personal circumstances and current legislation which is subject to change.