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Are bank deposits and gold safe havens?

Last week we looked at Australian shares and bonds as safe havens. This chart shows returns from two other so-called safe havens: bank deposits and gold (in Australian dollars).

Click to enlarge

The good news is that gold has indeed provided a hedge against inflation and against the long-term decline of the Australian dollar (which is essentially the same thing) over the very long term. It has generated zero real returns after inflation (i.e. a hedge but no actual positive returns), but that’s before storage and insurance costs which eat into returns.

The bad news is that the gold price shoots up once in about every 30 years and then takes the next 30 years to recover its real value (more on this later). That’s a long time to wait. But if bought cheap (it is not cheap now) gold can provide an effective hedge (but with zero returns) if you are prepared to wait.

In the meantime, gold has suffered negative real returns for six decades out of the 12 decades since 1900, including seriously bad decade-long losses in the 1910s, 1950s and 1980s. Hardly a ‘safe haven’.

Bank deposits have generated very low returns overall, which should be expected since they are virtually risk-free. The last time an Australian bank failed to repay bank depositors was in 1932. The problem is that bank deposits generated negative real returns after inflation for four whole decades – the 1910s, 1940s, 1950s and 1970s. That means steady declines in living standards for several decade-long periods at a time. Hardly a ‘safe haven’ or ‘store of wealth’ or a protector of living standards.

With the possibility of war in the headlines lately, the charts show that during both the First and Second World Wars, the so-called safe havens of gold and bank deposits provided no safe havens from decade-long losses.

Gold: another 31 years?

The gold price shot up to US$1,900 per ounce at the height of the US downgrade crisis in late 2011. The usual shrill 'end of the world' panic merchants were excited about buying gold as it was going to go up to US$3000 or even higher.

Then the gold price collapsed 44% from US$1,900 to US$1,050 by December 2015, forced down by panic selling at the bottom of the oil/gas/steel collapse and the regular ‘China slowdown’ panic. But the recent mini-recovery to US$1,300 this year with the global ‘reflation’ scare and the North Korea nuclear threat has people starting to panic-buy gold again.

Panic buying and panic selling is not investing, it is speculating. Gold is a legitimate asset with a place in long-term portfolios from time to time (personally I like gold but I have not owned gold ETFs since selling in 2011).

Here is a chart on the medium-term history of gold prices.

Click to enlarge

Long term holding of gold makes sense as an inflation hedge only if bought when it is cheap, at or below the long-term value around which it has oscillated for thousands of years. It is well above that now and has been since 2010.

The gold price shoots up rapidly about once in every generation, due mostly to money printing by governments or inflation spikes. It then takes a generation to recover its real value. It has been a neat 31-year cycle from one peak to the next, so people who panic bought in each bubble need to wait another 30+ years for another one.


Ashley Owen is Chief Investment Officer at advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is general information that does not consider the circumstances of any individual.


Larry Olivier
October 19, 2017

Yes, very sensible re gold. But let me add that when I served in various military adventures in Africa, when the chips were down and lives were at stake only Gold had the remotest possibility of saving you and you friends. Barrowloads of currency, share scrip in Apple etc.( even bags of uncut diamonds) was of no use with an AK 47 up your backside. Point being that there are many emergencies when the immediate short term outweighs long term considerations and where the odd bit of gold will do the job.
A little gold should be in every wealthy person's portfolio.
Because cash is money.Real money, in just about everyones eyes.

Warren Bird
October 20, 2017

Well maybe, but that isn't for inflation hedging purposes, rather as a form of political disaster insurance. A different topic, albeit an interesting one.

Charles Podnil
October 19, 2017

If you are paying 4-5% interest on a home mortgage but have the same amount in cash sitting in an offset account you are earning the interest rate on your mortgage on your offset account and it is guaranteed capital and the notional interest income is tax free.

The above article assumes you have spare cash and no mortgage

October 19, 2017

Hi Charles. People should pay off the mortgage first. 2/3 of Australian adults don’t have a mortgage. 1/3 of adults are renters, 1/3 own outright, and the other 1/3 have a mortgage.
The priority for that 1/3 of adults that have a mortgage should be to pay it of ASAP. But that is so old-school thinking these days!

Warren Bird
October 19, 2017

The period in which bank deposits performed badly against inflation was well before the current environment in which inflation is actually a policy priority. This means that, unlike in the periods that Ashley highlights, in the 1990's and since, when inflation goes up the RBA has increased rates. That flows into TD rates. In my view the +3% real return for a 3 year TD since 1980 is more indicative of what should be expected in the future than trolling back through more ancient history.

I totally believe in looking at long term historical evidence, but you need to understand the periods and what lessons are to be learned. The lesson that was learned in Australia - encapsulated for instance in the Campbell Inquiry Report of 1981 - was that a lot of the interest rate practices in the past had created problems. Deregulation then followed so interest rates are set in a totally different policy environment now than in the first 2/3 of the 20th century.

Let's be clear, though. This sort of analysis can never be a recommendation about what will happen in the near term to specific investment choices. For instance, if you take out a 3 year TD today at 2.8 or 2.9% and inflation stays around its current level of 1.9% then you'll make a real return. But if inflation rises and averages 3% over the next 3 years, then although the RBA would raise rates at some point to head off a break-out in inflation, your 3 year TD will end up giving you a small negative real return. Someone who holds off until 3 year TD rates are paying, say, 3.5% or more, will get the positive real rate of return.

Which leads me to a question about Ashley's TD chart. How have the returns been calculated? Have you just bought a 3 year TD at the start of each period and rolled it on its maturity into another? Or have you bought a 1, 2 and 3 year TD at the start then rolled the first one into a 3 year after that first year, etc? Very different results depending on how the "portfolio" of 3 year TD's is constructed.

So I'm simply not sure whether Ashley has actually proven anything about TD investments and inflation in this analysis.

Gold, yes, because it's a spot thing that you can hold over an entire period of a decade or couple of decades and make the calculations he's made quite easily. But the TD's mature within the period and you have to make an assumption about how the investment has been managed.

Phil Brady
October 19, 2017

Thanks Warren, that was I guess my query on the 1st section of this article about inflation fighting qualities of bonds, they seemed more than reasonable to me since the 80's. You have expressed it much more coherently than I, needless to say.

Warren Bird
October 20, 2017

Thanks Phil. I wrote an article for Cuffelinks a few years back explaining how a simple reinvestment strategy can make bonds even more effective as an inflation hedge, if you're interested:

Phil Brady
October 20, 2017

Thank you


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