The barbarous relic booms

The barbarous relic booms

Which asset has provided the best return in the last 5, 10 and 20 years: global equities, global government bonds or gold?

• The answer is gold. Its price has risen by 80% in the last 5 years, 134% in the last 10 years and a 552% in the last 20 years, outpacing, in each case, the returns from global equities or government bonds.

• The twenty-first century has been good for gold, its price having risen ten-fold from the lows seen around the millennium. Gold reached an all-time high of $2943 last month, up 40% in the last year, a stronger performance even than US tech stocks. Gold has since edged lower and closed last Friday at $2851.

• This latest wave of enthusiasm started in late 2022 and has occurred in the face of conditions that are normally seen as negative for the gold price. Interest rates are high relative to levels seen for most of the last 15 years, leaving holders of gold missing out on significant interest income. The dollar has been on an upward path, increasing the cost of buying gold for non-US investors and, supposedly, dimming its appeal.

• Gold yields no income and incurs costs for safe storage. It has limited practical use. About 10% of gold production is used in industry, mainly in electronics and medical uses. Gold has been a medium of exchange since ancient times but by 1924 the British economist, John Maynard Keynes, famously dubbed it, “a barbarous relic”. Gold no longer underpins the value of the world’s major currencies as it did in Keynes’ day, but it has plenty of fans and always has. JP Morgan, arguably the most important banker of the last century, put it succinctly, “gold is money, everything else is credit”.

• Gold has long been seen as offering protection against uncertainty and inflation. It is these factors that seem to offer the most plausible explanation for gold’s recent performance. As one source of uncertainty diminishes another, seems to pop - from the pandemic to conflicts in Ukraine and the Middle East to today’s tectonic shifts in US foreign and trade policy. In particular, gold seems to have been a beneficiary of concerns about tariffs and protectionism. Lingering fears of inflation, coupled with the memory of the inflationary shock of 2022-23, also seem to have played a role. Meanwhile western governments, particularly the US, are continued to borrow at scale. That conjures up the spectre of governments stoking inflation to whittle away the real value of public debt.

• Demand for gold has not just come from private investors. Since 2022 central banks have also raised their holdings of gold, motivated in part, at least, by the desire to diversify holdings away from the US dollar.

• Whether Keynes ‘barbarous relic’ will keep rising is anyone’s guess. Uncertainty and inflation risk, after all, were widely seen as also helping explain the vertiginous rise of Bitcoin which, until January, had put even gold’s ascent in the shade. Yet in the last six, hardly event-free weeks, Bitcoin has lost 20% of its value. Cryptocurrencies are a world of their own. As for gold, it offers a gauge, albeit a flawed one of market anxiety. In an uncertain world, that’s an indicator to watch.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 1.7% at 8,810, in part on hopes that the UK might be able to avoid the imposition of tariffs by the US

Economics

• US president Donald Trump said the US is working on a trade deal with the UK and that potential import tariffs on UK goods could be avoided 
• Mr Trump threatened to impose 25% tariffs on EU imports as well as an additional 10% tariff on Chinese imports. Mr Trump also said that the previously announced tariffs on Mexico and Canada will go ahead as planned on 4 March 
• The US House of Representatives passed a budget resolution to reduce taxes by $4.5tn and government spending by approximately $2tn. The measures are expected to result in a $2.8tn increase in the budget deficit by 2034, according to the non-partisan Committee for a Responsible Federal Budget
• US consumer confidence deteriorated in February for the third consecutive month, falling at the steepest rate since August 2021, according to the Conference Board
• UK house prices increased for the sixth consecutive month in February, by 0.4%, according to Nationwide
• Sterling rose by 1.7% against the US dollar in February, amid better-than-expected recent UK economic data
• The number of young people in the UK not in employment, education, or training reached a ten-year high of 987,000 in the final quarter of 2024
• Only 1% of the long-term sick in the UK are in work within six months, despite 20% wanting a job, according to the think-tank The Learning and Work Institute
• The total economic value of the UK’s net-zero economy increased by more than 10% in 2024, according to the Confederation of British Industry
• The UK’s domestic energy price cap will increase 6.4% from April, to £1,849, amid rising wholesale gas prices
• The UK Climate Change Committee recommended that to reach the government’s 2050 net zero target, one-third of the required cuts to greenhouse gas emissions by 2040 must come from consumers, primarily through higher uptake of heat pumps and electric cars

Business

• Mr Trump cancelled a concession agreement that allowed energy company Chevron to operate in Venezuela
• Apple announced plans to create 20,000 additional jobs in the US and invest at least $500bn over the next four years 
• The share price of Rolls-Royce rose 15% following the news that it would hit its profit target two years early, amid strong demand for its engines
• Energy company BP announced a 20% increase in oil and gas investment and a 70% reduction in spending on renewables as part of a ‘fundamental reset’ of its strategy
• The UK government said that BMW remained committed to future UK investment following a decision to delay a £600m investment in its Mini factory in Oxford
• Valeo and Forvia, two French car suppliers, warned that they would be unable to absorb the costs of US tariffs and suggested higher costs would be passed to customers
• The UK government pledged £200m for investments into the Grangemouth oil refinery site in Scotland as part of its planned redevelopment
• Revenues of US tech company Nvidia increased 78% in the final quarter of last year compared with 2023, amid strong demand for its AI chips

Global and political developments

• Donald Trump and vice president JD Vance publicly criticised and rebuked Ukraine’s president, Volodymyr Zelensky, in an acrimonious and unprecedented Oval Office press conference
• The event fuelled concerns in Europe that the US could abandon Ukraine and withdraw from the defence of Europe
• The Russian government is exploring options for western multinational organisations to resume operations in the country, the FT reports
• The centre-right CDU party won the German election with 29% of the vote, followed by the far-right AfD with a record 21% of the vote. CDU leader Friedrich Merz said his first priority was to try to form a coalition with the third place SPD party
• The head of the German Bundestag’s intelligence committee Konstantin von Notz warned that the recent election was subject to manipulation by Russian and other foreign actors
• The UK announced plans to increase its defence spending by £6bn, to 2.5% of GDP by 2027, funded by reducing the UK’s overseas aid budget
• UK chancellor Rachel Reeves attended talks with European finance leaders to discuss early-stage proposals for joint defence financing, amid recent speculation of reduced US support in Europe
• Mr Trump announced a US ‘Gold card’ visa scheme, costing $5m, which provides ‘green card plus’ privileges and provides a route to US citizenship
• The UK and India will resume trade-deal negotiations after previous talks expired last year due to state elections

And finally… last week, a UK court heard how thieves stole a fully functioning, 18-carat gold toilet from Blenheim Palace outside Oxford in just five minutes. The artwork, entitled ‘America’, was worth approximately £2.8m at the time it was stolen in 2019 – loo-ted