Back when we first launched Fortune & Freedom in 2020, we knew gold was going to be a key topic. Nigel Farage and I both believe that holding gold is an important part of any investment portfolio.
But, since we began writing about it, gold has performed badly in terms of what you would see in many headlines. The price is down from about $2,000 per ounce to around $1,600 per ounce today. That’s not as bad as some investments out there. But what makes it so notable is that gold should have soared given everything that has happened.
Inflation, financial crises, a pandemic and negative real interest rates were all supposed to be huge tailwinds for gold. But the price has trundled sideways or downwards in the end.
At least, that’s the impression you’d get from the US dollar price of gold.
Now I don’t know about you, but I don’t think about my stocks in terms of US dollars though. And the FTSE 100 isn’t priced in US dollars on the news either.
Yet the gold price is…
If you sell your gold, will you get US dollars for it? Or pounds?
While it’s important to remember the role the US dollar plays, and to make international comparisons in a common currency like the US dollar, this can be misleading for what investors actually experience and care about.
So, in terms of pounds, the currency used by most of our readers, how has gold performed?
The answer is… not badly at all. The price is close to all-time highs, in fact.
More interestingly, during the height of the pandemic crash of 2020, the gold price in pounds surged about 25%. During the market crash of 2022, it’s up about 12%.
So, when gold was supposed to perform well, it did.
Now you may think this is a bit shifty. If the gains really came not from gold, but from the pound’s plunge, then isn’t it a bit disingenuous to declare that we were right about gold?
Well, not if gold’s ability to profit from a plunging pound was one of the reasons we recommended it in the first place…
In our free report on gold, Nigel and I laid out precisely this point…
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The gold quadrants
There’s a particular reason to own gold which most British investors don’t know about, or never consider.
That’s because the majority of investment advice in favour of gold comes out of the US.
Ironically enough, American investors benefit least of all from owning gold. The Brits are somewhere in between, while the Australians and Canadians see their gold returns skyrocket during a crisis.
Why? Currencies and their exchange rates.
Gold, like oil, is priced in US dollars. That price is then converted to your local currency to get the local gold price. Even if the gold price is steady, changing exchange rates mean changing local gold prices around the world.
This creates an added complication for gold investors outside the US. They also have to take into account exchange rate moves.
How will their currency perform in different scenarios? Will it offset their gains or losses in gold, or will it add to them? After all, similar variables affect both the gold and currency markets. Money printing, crises and plain old GDP growth, for example.
If you want to understand how the exchange rate and the gold price work together, you can think about it in terms of what I call the gold quadrants.
The gold quadrants are the four possible outcomes when you invest in gold as a British investor. The gold price in US dollars can go up or down. And the US dollar to pound exchange rate, which gives you the pound gold price, can go up or down, too.
Two variables give you four possible outcomes.
Say the gold price in US dollars goes up 5% and the pound goes up 5% too. That leaves the UK gold price with no change. That’s because the gains in gold are cancelled out by the lower number of pounds you get for your US dollars.
This is only one of four possibilities. I’ve put all four possibilities in a table – the Gold Quadrants Table.
It shows all four possible outcomes for British investors. What I call “the four gold quadrants”.
The thing to understand is that these four quadrants are not equally likely to occur. Each one has a particular set of scenarios which will bring it about. Different combinations of money printing, GDP growth, inflation and everything else that can affect both the exchange rate and the gold price.
For example, during a financial crisis, the US dollar surges against just about all currencies. That means a weaker pound against the dollar. Gold is a safe haven, or safe investment. It spikes when risks in the economy rise, like in 2008.
This combination makes gold a brilliant investment for Brits because the currency move supercharges the gains from gold during a crisis – just when you want gold to perform well as an investment. As Quadrant 2 explains above, you profit from the gold price and the exchange rate.
Compare this to what happens to an American gold investor in a crisis. Their dollar currency is a safe haven. The US dollar surges alongside the gold price during a crisis. This decreases the benefit of owning gold, as it cancels out some of the gains.
Usually, gold surges faster than the US dollar, making gold a good crisis hedge for Americans too. But far less beneficial than for Brits.
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I think it’s fair to say that this description has played out.
During the crisis months of 2022 and 2020, gold performed well, and the pound’s plunge added to the gains.
Yes, the gold price fell the rest of the time in US dollars. But the pound’s drop counteracted this – as per what I refer to as Quadrant 4 in the analysis above.
As a result, overall, it’s fair to say that gold has been an excellent investment for those who see the world in terms of pounds.
Furthermore, the stability added to the gold price by the pound is one of the key reasons why UK investors should own it in the first place. The past two years have proven that.
However, you can’t just plough all your wealth into gold and expect it to go well. The gold price in terms of pounds has often fallen too. There are other quadrants out there…
To find out which parts of the stock market are most inflation proof, click here.
Nick Hubble
Editor, Fortune & Freedom
