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Is Gold a Good Investment With the Coronavirus Economy?

The novel coronavirus outbreak has had a massive impact on our lives globally. Economically too it has had a massive effect – but it has also thrown up some great investment opportunities.

This ‘Black swan event’ has sparked shockwaves across financial markets with volatility in equities, commodities and currencies hitting levels not seen since the 2008 global crisis.

In such uncertain times, nobody wants to hold risk. Most investors tend to rush to safe havens to protect themselves in periods of market turmoil.

A popular destination during this turbulent and rocky climate is Gold which has appreciated over 7% since the start of 2020.

The AAOIFI’s Shariah Gold Standard allows Islamic investors to invest in vaulted gold, gold savings plans, gold certificates, physical gold exchange-traded.

But is gold a good investment right now? We thought we’d do some digging and share what we found.

Why has gold appreciated over $100 since the start of 2020?

We have seen many central banks and governments unleash a wave of emergency measures to defend their respective economies from the COVID-19 induced market mayhem.

In the United States, the Federal Reserve enforced two emergency rate cuts while Congress approved a handsome $2 trillion virus rescue lifeline to aid to US businesses, workers and health care systems.

The Bank of England cut interest rates to its lowest point in history at 0.1% in an emergency move while boosting quantitative easing. To cut a long story short, over 50 central banks have cut interest rates this year to support their respective economies against the widening health crisis.

But what has this got to do with Gold?

Well, the precious metal is a zero-yielding asset which tends to perform well in a low-interest rate environment since the opportunity cost of investing in it decreases. As interest rates across the world fall, attraction towards Gold typically jumps.

That’s why gold prices have risen.

Should you invest in gold?

As of today, the coronavirus has spread to over 200 countries with 585,000 reported cases and more than 26,000 deaths.

In a bid to slow the outbreak, many countries have closed their borders, travel restrictions are in place and nationwide lockdowns imposed.

Containing the coronavirus will most likely lead to a drop in spending as households spend less. Given that consumer consumption is an engine of growth for most major economies, if everyone piled into gold, we’d have very little actual spending or productive activity going on – which would create job losses and an even bigger drop in household spending. A vicious cycle.

In other words, if everyone retreats towards safer asset classes because they are scared of a recession, ironically that will make the recession more likely.

Okay so gold investing might not be in the greater good but is there money to be made?

We think a good way to think about gold is to think of it as money – not an investment class. Gold doesn’t yield you anything and is fundamentally a useless thing (other than for jewellery etc.) It has historically been used as a store of value and a means of exchange.

Our investment philosophy at IFG has always been to encourage long-term mindset investment and favouring those investment classes that add real value to the world. So for example we would prefer an investment into a great long-term growth company that is making advances in healthcare technology over a short-term trading strategy that scalps profits every day due to market fluctuations. The former fundamentally makes the world a better place and is defensible long-term while the latter is less so.

With that in mind – we think there are much better investments usually than gold. Asim Qureshi, an entrepreneur and former investment banker nicely summarised this in a recent Linkedin post:

We broadly agree with Asim’s analysis.

Gold is not best seen as an investment – it should merely be seen as a store of value. It should not be expected to give you a “rent” or a “profit” over time. It should however be inflation-proof unlike some currencies.

The one situation in which gold makes sense

If the entire world economy has gone that much to pot that currencies such as the Great British Pound and the Dollar are devaluing fast and/or people are refusing to accept them as payment – then gold is definitely a safe haven storage for your wealth.

But if such a situation occurred, I would presume we would be at apocalyptic stage – in which case the state of your wealth might be a little less relevant.

So what should I invest in then?

Don’t get us wrong, as part of a well-diversified portolio, a bit of gold doesn’t hurt. But the key bit is your portfolio should be diversified.

So you should invest in multiple asset classes.

Investing in a well-diversified portfolio comes with many advantages including less exposure to market volatility, less time monitoring the portfolio, minimising the risk of loss, preserving capital and even peace of mind among many other benefits.

One of the big challenges for Muslims though is finding halal investments easily and then comparing and working out if they’re commercially a good idea or not.

Our halal investment comparison engine allows you to do just that. You can select your risk appetite and investment needs ranging from startups, stocks, SME Finance, Sukuk, savings accounts and even gold. Mohsin also wrote an article recently specifically on stocks and shares and opportunistic investment. Check it out here.

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  • This was really useful, jazakAllahu khayr.

    Reply
  • Good article.

    Couple of points I’d mention from my perspective:
    1. “In other words, if everyone retreats towards safer asset classes because they are scared of a recession, ironically that will make the recession more likely.”
    If people sell stocks and buy gold, I don’t see how that makes a recession any more likely. All you’re doing is putting cash in one investor’s hands and taking off another, so it’s net nil. What causes the recession is the fear, which results in people not spending/investing. The switch in assets is the result not the cause.

    If people don’t buy something, or don’t invest in a new venture, or in their business, (which is ultimately due to fear) that would make the recession more likely fair enough.

    Just think it’s important to differentiate.

    2. Also worth saying that personally I think the other scenario where gold is worth investing in is if you believe it will perform better than stocks/bonds over any timeframe, e.g. 5-10 years. History tells us that gold returns have absolutely smashed the stock market sometimes over these kind of short periods. e.g. 1970s, 2000s.

    But, if you are going to buy and hold completely agree then yes stocks do beat gold over a longer term horizon. So depends on the investment strategy. Clearly mine is more geared to changing the mix of assets as I go, depending on where I see the opportunity!

    Reply

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