Low bank interest rates adding to gold’s allure

As bank deposit rates drop to new lows and the equity market rebound makes shares pricey, investors are heading to gold, says Pie Funds chief executive Mike Taylor.

Since the Covid-19 crisis hit, gold has risen to record prices — in New Zealand and US dollar terms.

Gold was again being used as a safe haven investment, Taylor said.

Its most recent NZ dollar peak was on May 18 at $2964 an ounce.

In US dollar terms, it peaked just last week above US$1780 an ounce.

“As we’ve seen in previous slumps — like the GFC — gold is coming back into play as a place to park cash,” Taylor said.

Historically, people have tended to see gold as a solid, defensive investment in times of crisis, but it wasn’t actually as safe as cash, Taylor said.

“The gold price is volatile, we call it a safe haven. It’s a place to park money, but it’s much more risky than cash and is more akin to equities,” he said.

Today’s incredibly low bank deposit rates were driving new interest in gold, Taylor said. “Banks are actually flush with cash now.”

That was down to a combination of Government fiscal policy — which was keeping paycheques coming into bank accounts — and the Reserve Bank, which had slashed the official cash rate and launched a $60 billion quantitative easing programme designed to keep market rates down.

“In addition, during lockdown the savings rates went up substantially. If you couldn’t spend any money it sat in the bank,” Taylor said.

“That’s allowing banks to say: well, we don’t need this deposit rate. So they can cut the deposit rates and that’s allowing them to get a nice margin between the deposit rate and the lending rate.”

Extremely low interest rates were a problem that other developed countries — particularly in Europe — had been dealing with for some time, Taylor said.

“So with deposit rates at 1 per cent you have to go elsewhere to seek a return,” he said.

“Because if you are a retiree, or anyone else trying to earn a return off cash, there is no return really — after you take out tax.

“So that is encouraging us all to take some form of risk to get a return,” he said.

The upside was that this could force investors to help the economy grow by investing in more productive areas — which central bank governors like Adrian Orr have been keen to encourage.

But with sharemarkets suffering from “vertigo” as investors surged back after the March crash, gold was coming into play.

On the face of it, company earnings as of today did not look good enough to justify some share market values, Taylor said.

“What equity markets investors are doing is looking 12 months out and saying we believe we’ll be through this crisis and earnings will be well on the way to recovery,” he said.

“In addition, we just have an unprecedented level of stimulus.”

The US Federal Reserve alone had put in about US$5.7 trillion.

“All that money finds its way into investments.”

As we’ve seen in previous slumps — like the GFC — gold is coming back into play as a place to park cash.

Mike Taylor, Pie Funds