What is gold – is it a hedge against inflation or against deflation, or just a safe-haven in times of crisis? We ask whether inflation or deflation is the greater risk in the coming months and years and whether gold is a sensible option for investors looking to diversify.
With price rises at their lowest levels in four years and the economy depressed, savers and investors could be forgiven for assuming that inflation is one thing they don’t have to worry about for the moment.
Indeed there’s been some talk of deflation recently, thanks to the self-induced economic coma Covid forced developed economies into. Data released on 20 May showed that the UK inflation rate had tumbled to 0.8 per cent in April from 1.5 per cent in March as coronavirus pushed Britain into lockdown.
The only real currency? As more and more global currency is printed, tangible gold could become a better bet
At the time, Howard Archer, chief economic adviser to the EY Item Club, said: ‘Inflation looks certain to fall back markedly further and we believe it could get as low as 0.3 per cent over the summer.’
But deflation – as in a period of negative inflation, or falling average prices – is a rare beast. Often talked about, seldom spotted, and even then only fleetingly – a bit like the yeti.
When prices fell an annual 0.1 per cent in April 2015 – the first time there had been negative inflation since the 1960s – there was a lot of talk of a deflationary episode.
Despite another dip into negative territory later in the year, the average inflation rate for 2015 was 0.37 per cent and deflation shambled off into the undergrowth again.
The same could be said of ‘spiralling inflation’, another elusive creature from the financial bestiary, whose imminent appearance was warned of pretty much constantly in the years following the financial crisis.
The UK inflation rate – as measured by CPIH – over the last 30 years.
Ultra-low interest rates and central banks’ quantitative easing programmes were storing up dangerous inflationary pressures in the global economy, most analysts opined – at some point she would blow.
Admittedly, inflation in the UK averaged 3.86 per cent in 2011 – high by the standards of this century – but that’s as close as we got to runaway prices, and inflation came back to heel quite swiftly.
David Coombs, manager of the Rathbone Multi-Asset Portfolio Funds
David Coombs, manager of the Rathbone Multi-Asset Portfolio funds, believes that deflationary forces driven primarily by globalisation and the continued pace of technological innovation are of such a scale they will offset short-term risks of inflation.
‘There will be some pent-up demand post lockdown certainly but I believe consumers will be looking for value more than ever and unemployment is likely to be higher and job security lower,’ he says.
Other analysts reckon this time could be different.
Alasdair McKinnon who manages the Scottish Investment Trusts says the monetary ‘shock and awe’ that has been deployed by the US and other authorities against the Covid crisis is of a different degree than anything that has gone before.
Not only has it forestalled the direst scenarios that looked possible in mid-March, including that of deflation, the global response from central banks is storing up inflationary pressures.
Alasdair McKinnon of Scottish Investment Trust
‘There’s a lot more money swilling around,’ he says.
‘Many households are better off, even furloughed households are . But you can’t spend it as easily: supply chains are clogged up and capacity has been eradicated in hospitality and leisure.
‘You’re an independent restaurant and can only serve 10 instead of 30 people – you have to put prices up to survive. It will be a combination [after lockdown] of a wall of money in demand and restricted supply.’
But why did the last dose of quantitative easing in the wake of the financial crisis not result in runaway inflation?
He argues that there was inflation last time but largely in asset prices (the stock market and property) and under-reported sectors like healthcare and housing costs.
This has been termed the ‘new stagflation’ by Bill Dinning, at Waverton Investment Management: a stagnating real economy in concert with the rising price of financial assets, especially equities.
Mr Mckinnon adds that it’s not just QE now, it’s akin to helicopter money: ‘We’re injecting money into people’s pockets, and that’s probably why there was relatively little resistance to lockdown.’
AJ Bell’s Russ Mould
Russ Mould at investing platform AJ Bell notes additionally that the current stimulus from the Fed dwarfs what it did 12 years ago: ‘This time it has poured in $3 trillion in barely three months, whereas it added $3.2 trillion in QE stimulus in 12 years from 2008 to 2020.
‘That $3 trillion in extra QE is more than $20,000 per US household.’
Putting a number on the wider shock and awe, he adds: ‘Between [governments and central banks], over $20 trillion of fiscal and monetary stimulus has been announced with more coming nearly every week.’
Though he also observes that the money once more seems to be going to Wall Street rather than ‘Main Street’.
He adds that monetary authorities will find it nigh-on impossible to turn the taps off: ‘The Fed and other central banks and governments never got round to withdrawing the stimulus applied in 2007-09. It has to be odds against that they get the chance or have the inclination to try too hard this time around either.
‘Again, that then begs the question of what do they do when the next recession comes.’
And Alasdair McKinnon concurs: ‘Economies and stock markets will probably tank if [if QE stops]. Trump has an election coming up and he’s not going to risk that,’ he says.
The power of the printing press: US Federal Reserve asset purchases and the S&P 500 index.
‘We don’t think the money spigots will be turned off: governments have backed themselves into a corner, having discovered the power of the printing press – they don’t have much choice but to keep going.
‘And governments benefit from inflation of course in that it depletes their debt mountains.’
With this in mind – as well as an historical inclination towards gold as a key investment asset – Mr McKinnon’s investment trust has significant exposure to the precious metal, with its top three holdings in some of the world’s biggest gold explorers and miners [see factbox at end of article].
The world gold price in US dollars since 2010.
He says: ‘Gold is money you can’t just print more of. All the gold ever mined still exists, and mine output adds just 1 per cent to that total volume each year. Gold protects purchasing power and has a fairly constant value vis-à-vis various man-produced items through history.’
So, compared to modern currencies which are just fiats, backed only by government promises, it holds its value better in the face of inflation.
‘Money is not backed by anything tangible,’ he concludes. ‘You can just print more of it. And we’re printing a lot of money at the moment.’
While he is more worried about deflation than inflation, David Coombs – traditionally a gold sceptic – is in agreement that it is a good time for investors to gain some exposure to the precious metal.
The world gold price versus US Federal Reserve asset purchases (otherwise known as quantitative easing).
‘Gold is a good hedge against disinflation: a valuable benefit these days considering we think we’re heading into 10 years of disinflationary headwinds. Everyone says that gold is a hedge against inflation, which it absolutely is not. It’s actually a hedge against capital destruction, which stagflation and the others do in any event.
‘So, having spent years arguing the case for every other asset, these abnormal times have lead us in an abnormal direction and we’re now buying gold as a good store of
‘With negative interest rates on various bonds, you’re actually paying some governments to lend them money. By selling these negative yielding bonds to buy gold, you are sort of increasing your income, i.e. no yield versus negative yield.’
He adds that global instability is a further factor in gold’s favour: ‘The US election could be very close and the outcome could be open to legal challenge – remember hanging chads? Add trade wars, Brexit, OPEC and COVID second wave and you have all the trouble you need to justify hiding in something shiny.’
Russ Mould says gold functions as a hedge against a ‘loss of control’ by governments and monetary authorities at a time of crippling uncertainty.
With the risk of unforeseen economic fallout from lockdown, the risk of a second outbreak, and the likelihood that authorities will feel compelled to maintain and even increase stimulus, he adds that there are worse options than gold for investors looking to diversify.
How to invest in gold
According to precious metals dealer BullionVault, the number of first-time buyers in the metals over the past three months has been running at five times the level of last year.
Over the past year, gold has performed the strongest, rising in sterling terms by some 28 per cent while silver and platinum prices have increased by 20 and 3 per cent respectively.
Investors can buy the metals in various ways. They can buy coins and bars through organisations such as Royal Mint, although 20 per cent VAT is payable on silver and platinum.
There is also a spread – anything between 5 per cent and 10 per cent – between buying and selling prices.
Alternatively, they can buy the metals that are then held in a vault, avoiding VAT in the process. Major players include BullionVault and Goldmoney.
The final route is via a stock market listed fund: one that either tracks the price of a specific metal (an exchange traded fund) or invests in a portfolio of mining company shares.
SCOTTISH INVESTMENT TRUST
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Fund tech revolution, Bank chief tells Chancellor
Britain’s top economist has called on the Government to spearhead a tech revolution for millions of firms, creating a ‘faster and smarter’ economy as the country fights its way back from the Covid-19 crisis.
Bank of England chief economist Andy Haldane – writing in his capacity as chairman of the Industrial Strategy Council – said a new blueprint must be drawn up with a raft of measures, including tax incentives and access to finance to feed an ‘appetite’ among firms to adopt new technology.
The surprise intervention – in a joint document prepared for The Mail on Sunday by Haldane and former John Lewis Partnership chairman Sir Charlie Mayfield – comes just weeks ahead of an expected Spending Review by Chancellor Rishi Sunak.
Plea: Andy Haldane is calling on Rishi Sunak to draft a new blueprint for the economy
It is unusual for a senior official who also holds a high-ranking position at the Bank of England to make such broad-reaching policy recommendations.
Haldane, who sits on the Bank’s Monetary Policy Committee, and Mayfield want small and medium-sized companies to urgently adopt or update software across key areas such as accounting, HR, customer relationship management and marketing.
The paper says the economic recovery in July was ‘further and faster than anyone expected’ after the collapse in the second quarter.
But the writers say it is vital to seize ‘the opportunities, as well as the obvious challenges, of Covid’ and ‘technologically upgrade our businesses and our economy’.
UK business has been a ‘laggard’ in adopting new technology despite playing ‘a leading role’ in developing it, the paper says. ‘That is particularly true among the smaller and mid-sized businesses which employ nearly two thirds of people working in the UK. This explains why, despite rapid innovation, aggregate productivity among UK companies has flat lined for more than a decade.’ Haldane and Mayfield add: ‘Technology adoption needs to be at the heart of industrial policy. Levelling up the UK’s companies, through improved tech adoption, is an essential element of levelling up our regions.’
The paper – which the MoS has made available in full at thisismoney.co.uk – calls for ‘incentives for companies to make the right investment choices’ and to make it easier for them ‘to access finance to fund this investment’.
It also calls for support through advice shared by large corporations with smaller firms, through local ‘tech hubs’ and online. A survey of 500 small and medium firms released alongside the paper reveals one in eight are using systems more than a decade old and another third using systems six to ten years old. A third said they have acquired technology that has barely been used.
But the paper says the Covid crisis has presented a major opportunity because ‘rapid and radical technological adoption has been essential to the survival of many firms’.
Mayfield chairs Be The Business, a Government-backed organisation set up to solve Britain’s sluggish productivity largely by encouraging wider use of technology.
Its research has revealed adoption of new technology among businesses rose four times faster during the crisis than it did for the entirety of 2019. In many cases, firms were forced to act as they switched to working from home. Mayfield said last night: ‘Business technology has not kept pace with consumer technology. It’s not just about Zoom and it’s not about AI and advanced technology.
‘It’s about wider adoption of pretty well-established tools that have been proven to improve growth of businesses that use them – accounting and HR software, CRM [customer relationship management] systems, online trading, export tools and really getting to grips with social media and marketing.’
But there had been resistance in the past from firms fearful of the disruption that implementing new technology can cause. ‘It’s hard work and it’s difficult,’ he said.
Referring to John Lewis’s experiences implementing new IT systems since 2014, Mayfield said: ‘I have the scars on my back from a well-resourced business that has found tech adoption difficult. It costs a lot, took longer than planned and at the end of it all the benefits weren’t quite as clear as they were at the beginning.’
‘But I’ve no doubt we did the right thing. If we hadn’t, the business would be in a far worse position than if it hadn’t,’ added Mayfield, who left John Lewis earlier this year.
He said Be The Business was piloting ‘tech adoption labs’ across the country and large companies had offered ‘chief technology officers on demand’ to help firms cope.
‘We’ve got the template, we’ve got the playbook, we’ve got Britain’s best businesses and access to expertise – Cisco, Openreach, Amazon, Google. We are asking the Government to make this a priority for rebuilding the UK.’
He added: ‘Eat Out to Help Out has had a pretty dramatic impact on restaurants. What we need is a similar message for business leaders, something along the lines of ‘Tech Up to Grow Out’. It should become a fundamental part of the recovery.’
HOW DO GOVERNMENTS AND BUSINESSES ENSURE BOUNCE-BACK CONTINUES?
By Andy Haldane, chair of the Industrial Strategy Council, and Sir Charlie Mayfield, chair of Be The Business
UK GDP had, by July, recovered around half of its Covid-related losses, rebounding further and faster than anyone expected. That’s the good news. The bad is that the economy remains 12 per cent smaller than at the start of the year. So how do Governments and businesses ensure this bounce-back continues and that the opportunities, as well as the obvious challenges, of Covid are seized?
A large part of the answer lies in improving levels of technology adoption among businesses. While the UK plays a leading role in developing new technology and innovation, it is a laggard when it comes to its wider adoption across companies. That is particularly true among the smaller and mid-sized businesses which employ nearly two thirds of people working in the UK. This explains why, despite rapid innovation, aggregate productivity among UK companies has flat-lined for more than a decade.
Yet, for all its challenges, Covid has shown what is possible on this front. With their normal business models disrupted so significantly, rapid and radical technological adoption has been essential to the survival of many firms. Even among the more mature aspects of technology, such as e-commerce, the pace of adoption has been rapid. Data from Be the Business shows tech adoption was four times faster during the crisis than the whole of 2019.
It is good news that many more businesses now have the appetite and experience to upgrade their technologies. The less good news is that many of the barriers to that wider adoption are long-standing and remain deep-seated. Understanding those barriers, and removing them, is crucial if the benefits of technology – for productivity, skills and jobs across every region – are to be unleashed.
Be the Business, with support from McKinsey, has just completed the largest-ever study of these barriers and opportunities to widespread adoption of technologies. Some of these blockages sit in firms themselves, through a lack of information or appetite for change. Others exist among the suppliers of technology, in particular to smaller companies. Both the demand and supply sides need fixing, at source and at speed, if the opportunity is to be seized.
To do so, we believe three things are essential.
First, businesses need access to independent advice and resources to guide them towards the right technology choices. At present, in particular for smaller companies, this is daunting. There are mountains of information and training available on how to use specific software and tools. But there is no one-stop-shop for this information and no clear guidance to help businesses understand what kit would best meet their needs – until now.
On the new website, Be the Business Digital, businesses have all the answers they need. It is full of real world experience of business leaders who have learnt the hard way about tech adoption – where they went wrong, why they persevered, and what it did for their businesses. It’s constantly being updated and developed, providing a guide to the many business leaders up and down the country who know they need more tech but aren’t sure where to start.
Second, business leaders themselves need access to expertise and training. Only big firms have Chief Technology Officers. Most businesses can’t afford them and nor can they afford the fees of professional service firms who might fill the gap. We need, in every region and major town or city, a place where businesses can come for help when they need it – local hubs for business support. This should not just be government provided support. The private sector must play a role here. More than 100 of the UK’s best firms, including our best tech companies, have already committed to supporting Be the Business’ efforts.
Finally, there is the role of policy. Technology adoption needs to be at the heart of industrial policy. Levelling-up the UK’s companies, through improved tech adoption, is an essential element of levelling-up our regions. That means creating incentives for companies to make the right investment choices – for example, with a level playing field between investing in machinery versus software.
It also means making it easier for businesses to access finance to fund this investment. The UK has led the world with its Open Banking initiative to make personal bank account data portable, enabling people to switch their accounts cheaply and easily to improve innovation and competition. There is a strong case for doing the same with business data, making this fully portable and thereby enabling companies to switch vendors easily and cheaply to unleash finance and innovation.
The Nobel Prize winning economist Robert Solow famously asked: if technology is so ubiquitous, why doesn’t it show up in productivity statistics? We now know why: much of that technology simply isn’t found in many British businesses. Now is the time to technologically upgrade our businesses and our economy, building back not just better, but faster and smarter.
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Rolls-Royce set to tap investors for £2.5bn cash boost
Rolls-Royce is on the cusp of launching an emergency fundraising to tap shareholders for between £2billion and £2.5billion.
City sources said the FTSE100-listed jet engine maker is close to securing the funds from investors, possibly through a rights issue and placing.
Goldman Sachs and Morgan Stanley are believed to be among the investment banks working on the fundraising deal for Rolls-Royce.
Emergency: City sources said the FTSE100-listed jet engine maker is close to securing the funds from investors
It had been thought Rolls-Royce may look to raise £1.5billion from investors. But sources claimed the blue chip firm is now seeking an extra £500million to £1billion, possibly from sovereign wealth funds.
The move to launch such a large rescue fundraising comes as Rolls-Royce shares – which closed last week at £1.80 – flirt with a 16-year low amid concerns about the company’s financial position.
Investment bankers last month told The Mail on Sunday that they had heard rumours the Government was ‘starting to get worried’, raising the possibility of state intervention.
Rolls-Royce – in which the Government has a ‘golden share’ that gives it the right to block a takeover – has been hit hard by the pandemic. In part that has been because the company operates a power-by-the hour model, where it sells engines at a loss and later receives payments according to how much they fly. This arrangement has left the company bleeding cash.
The firm is also particularly exposed to the collapse in long-haul travel because it makes engines for bigger planes such as Boeing’s 787 Dreamliner and Airbus’s A350.
Rolls-Royce’s debt has been downgraded to junk status and major long-term shareholders, such as American activist ValueAct Capital, have been selling out of the company.
In a note to clients several weeks ago, David Perry, an analyst at JP Morgan, said: ‘An £8billion hole will need much more than a £1.5billion rights issue. We believe RollsRoyce needs to raise at least £6billion [through equity raise sales and disposals] to put itself on a sound financial footing.’
Perry added that the company’s debt pile will be almost £19billion by the end of the year. He believes that £1.5billion may not be enough to save the firm.
The analyst suggested that Rolls-Royce needs to issue £6billion of equity and this might not be possible by just relying on institutional investors. ‘We think there is a high chance of Government intervention,’ he added.
Aside from tapping stock market investors for fresh cash, Rolls-Royce is also seeking to generate about £2billion from selling divisions – including ITP Aero – over the next 18 months.
ITP Aero is Rolls-Royce’s Spanish engineering division that makes turbine blades for engines.
A spokesman for Rolls-Royce said: ‘We continue to review a range of funding options to further strengthen our balance sheet.
‘These could include debt and equity, but no final decisions have been taken. We have already taken swift action to strengthen our liquidity with £6.1billion at the end of the first half of the year and a further £2billion term loan agreed in the second half.
‘We have also announced £1billion of cost mitigation activity in 2020 and launched a re-organisation of our Civil Aerospace business to save £1.3billion annually.’
Last month, the firm’s woes were compounded by the announcement that finance chief Stephen Daintith was leaving the business for online delivery firm Ocado.
Daintith has said he will stay for a transition period.
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Casino boss: 10pm curfew will hit night-time industries
The boss of Britain’s biggest casino complex has warned that a 10pm curfew would be ‘disastrous’ for night-time industries.
Simon Thomas, chief executive of the Hippodrome in London’s West End, said casinos make half their revenue after 10pm, and a national curfew would force him to make ‘substantial redundancies’ among his 700 staff.
He already expects to make a ‘significant loss’ this year, after losing £1million a month during the five months the business was closed, and said the situation remains ‘fragile’.
Losing streak: Visitor numbers are down 80 per cent at the Hippodrome
Visitor numbers are down by about 80 per cent since the Hippodrome reopened last month.
‘The curfew poses an existential threat to theatres, hotels, bars and clubs,’ said Thomas.
‘It is an unnecessary over-reaction to Covid and it would be a disaster for London.’
Thomas owns about half of the Hippodrome, which has casinos, restaurants and bars on six floors of a 19th Century former music hall and circus. His 86-year-old father Jimmy owns 20 per cent.
He said he had worked hard to make the casinos safe, with gaming positions separated by flexi-glass walls, and the 80,000 sq ft premises prepared to receive just 400 people, down from 1,600.
He has raised £10million of Government loans and bank debt. A consultation on redundancies has started, but the number of job cuts has not been confirmed while 300 staff remain on furlough.
Thomas said: ‘It’s frustrating as the core business is excellent – the building is beautiful and a huge asset to London. We are very happy to pay tax, to provide jobs and entertain people – but we have to be allowed to do it.’
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