Investors buy gold in response to Ukraine war

UK retail savers are joining investors rushing into gold and taking the price this week close to its all-time high as they look for safe haven assets in the face of the war in Ukraine.

“Investors are making a beeline for it because it is considered a safe store of value during times of geopolitical uncertainty and rising inflation,” said Richard Flax, chief investment officer at digital wealth manager Moneyfarm.

With the conflict adding to existing inflationary pressure across commodities markets, gold is playing its traditional role for investors seeking to escape from volatile equity markets, analysts say.

The precious metal this week crossed the $2,000 barrier and traded at $2,074 an ounce on Thursday — just shy of its August 2020 record of $2,085. Other commodities such as oil, wheat and nickel have also spiked following talks of import bans on Russian oil.

Like other commodities, the precious metal’s price is driven by supply and demand. But it works in an “almost opposite demand cycle to shares,” said John Moore, senior investment manager at Brewin Dolphin. “We demand it when things are concerning . . . if I were very optimistic about the world I may sell my gold and buy some shares.”

Even before Russian tanks crossed the Ukrainian border, the price of gold was “steady”, despite a strong dollar and expectations of interest rates hikes. This “on its own was remarkable”, said Michael Widmer, metals strategist at Bank of America.

“Wars on their own don’t tend to be sustained bullish drivers of gold, there’s an initial push higher as they hit off,” says Moore. The inflationary pressure in Europe is driving the surge, he adds. Savers do not want to hold cash in this environment, while the volatility of markets is putting them off investing in shares.

Symon Stickney, chief executive of investment research firm Collidr, said: “It’s especially in crises that gold’s performance becomes far less correlated to shares, allowing investors to diversify their risk.”

Physical gold has been traded for millennia. Bullion, coins and jewels have intrinsic value because of the metal’s rarity. Dan Kemp, chief investment officer at Morningstar, says that the asset does not generate income but that does not mean it does not belong in a portfolio as a diversifier.

Unlike securities, gold ownership is free of ties to financial companies. But it does come with storage and insurance costs, not to mention the risk of theft. And while bullion and gold coins are exempt from VAT in the UK, that is not the case for jewellery. Physical gold can also be hard to sell quickly in a crisis, as it will involve a trip to a specialist bank or other buyer.

Gold exchange traded funds (ETFs), are more liquid. Typically favoured by UK savers over physical gold, they can be traded easily.

Gold ETFs, replicating bullion prices, are an “easy-access” product for investors who “don’t want the baggage of physically owning gold,” said Moore. They perform in line with bullion, “albeit with a small cost of administration and ownership”.

Some investors may also consider investing in gold mining stocks which can be a way to get “better returns” and income through dividends, said Moore. But mining stocks are “not for everyone”: they are a trickier investment, which requires more risk appetite, he added.

The FTSE gold mines index has risen by 18 per cent since the start of January and by 12 per cent since Russia invaded Ukraine.

Investing in mining stocks is more complex and less predictable than gold ownership. Mining companies often operate in difficult political, technical and environmental conditions.

Their stock values are not always closely correlated to gold. Moreover, investors concerned about their environmental, social and governance impact might find that they do not align with their investment aims, as they have been criticised over their pollution records and labour practices.