16th December 2014 by The Harried House Hunter
After 2013 belonged to equities and gold prices sank, 2014 saw a split between the US and the rest of the world thanks to the rising dollar. Gold gained over 6% in 2014 for UK investors as the FTSE All Share index fell. That is the ninth time in 15 years gold has beaten the total returns from UK shares.
While longer-dated government bonds topped the table in 2014 with a return of 21%, gold remains the best-performing asset of the 21st century to date, gaining 330% since 1999 against the FTSE All-Share’s 173% total returns, 251% from longer-term gilts, and 231% from housing.
UK Sterling asset-class performance, annual returns
Looking to 2015
The key risk for UK investors in 2015 looks to be Sterling. Because the Bank of England can’t cut short-term rates any further, weak growth in 2015 could very likely spark new Quantitative Easing. QE adds to the risks already facing the Pound from our huge current account and fiscal deficits, the political mess coming in May’s general election, and the market’s slow realization that UK austerity has not begun.
2015 also brings a review of the international monetary system’s Special Drawing Right, which could weigh badly on sentiment. The Pound currently accounts for 11% of the SDR’s reference value, yet our GDP is only 3.3% of the world total. That shows just how far we’re still punching above our weight, especially as China lobbies to see the Yuan added to the SDR to reflect its 12% share of world output.
UK savers wanting to take cover should note that, in the 20 years since 1975 when the Pound has fallen against the other major currencies, gold priced in Sterling has risen 15 times, averaging 12% gains versus the 7% drop in Sterling’s trade-weighted index.
Looking to gold’s floor, world mine output is likely to have peaked this year. Cost-cutting is starting to delay or close new projects, and lower investment means lower output further ahead. But on the demand side, we still don’t know how China’s gold buying will respond to an economic slowdown.
Now the world’s No.1 private buyer and importer, as well as the No.1 mining producer, China has grown its gold demand twice as fast as GDP since the turn of the century, because income growth has released hundreds of millions of people from poverty to start building personal savings and physical gold remains their first choice. With Beijing looking set on reducing credit excess, a slow and managed deflation would cut household spending. But a hard landing in contrast will likely spur a new flood of Chinese gold buying as investment capital flees major banking and bond defaults.