A rocky path ahead for investments in 2015

Investments in 2015

It seems like quite a while ago now since the financial markets offered some stability. With the turn of the new year, the hope is that the coming 12 months will offer a fresh start for investments in 2015. Unfortunately it seems the green shoots of UK recovery experienced last year may prove to be the calm before the storm. Dramatic oil price falls, terror atrocities and the Swiss Franc decoupling from the Euro have already occurred in the first weeks of the year. With the possibility of a hung parliament in May, it seems that 2015 will be a very rocky year indeed for the investment world.

April will mark the start of pension freedom whereby 100% of a pension can be taken rather than being forced to purchase an annuity. Therefore falls in the value of your pension fund just won’t mean the difference of a few pounds a month to your annuity income. It could lead to a fall of thousands, or tens of thousands in the pension cash you hope to get your hands on. So it’s now more relevant to hedge against market turmoil than ever due to a far deeper impact on your personal finances.

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Hedging strategy

Such macro economic mayhem requires portfolio diversification to protect its value from

PHYS01_Animated_Gif_2_MPUdramatic falls. The scale of the falls we’ve seen in the oil price and Sterling suggest their impact on investment values could vast. This volatility will doubtless cause losses unless pensions and investments are spread amongst the various asset classes, with physical gold playing a major role in that protection. No-one has a crystal ball to predict accurately how any asset class will perform in a given period. The current market edginess makes this nigh on impossible. If we look at the performance of the major asset classes over the past 10 years, gold has been the top performer in 4 of those years and second best in another 2. Last year saw a steady 5.89% return, but this year’s market events could lay the foundation for another gold bull run.

Falling Sterling and inflation

In Sterling terms, gold is up more than 12% in the first 3 weeks of 2015. Part of this is due to its qualities as a safe haven, protecting from the losses we’ve seen in equities and global terror events. However, the price is also being driven by a depreciating Sterling. The domestic currency has lost ground with almost all major currencies except the Euro which seems to be holding up the white flag. This is in part due to super low inflation and the acknowledgement that interest rates not only don’t need to increase, but any hike would damage our fragile recovery. Analysts suspect that rates will stay at record lows for the next 18 months at least. This is great news if you’re looking for a loan with record low interest rates. However, for the investments in 2015 it means deposit rates are near zero. With the General Election in May and no one party pushing ahead in the polls, the possibility of a hung parliament will exert further pressure on Sterling.

For those seeking protection from a weak currency, gold investment not only diversifies away from holding all your assets in Sterling, but also directly benefits from a falling currency value.

European disintegration

By far the weakest region is Europe. It has lagged well behind the UK and US in recovering from the credit squeeze of recent years as it looks to simply survive. The worst affected countries like Greece, Spain and Portugal have suffered hardship not seen in generations with record unemployment figures. So far the stronger countries like Germany have stuck by the weaker ones in the hope of somehow coming through the storm with the Euro intact. However, 2015 could well see the entire region finally explode under the pressure. Already the Swiss have shocked markets by losing faith in the Euro, decoupling from its own currency. As a major pillar of Euro strength, the Swiss Franc being pulled away could well lead to the entire building crashing down. Certainly with the Swiss turning their back, there will be many Germans also tempted to go it alone. Not a great prospect for investments in 2015.

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Speculation is mounting that Greek elections this coming weekend could see them leave the Euro and consequently tear up its austerity agreement. Greece’s promise to pay back loans through squeezing the country of its finances has been met with huge resistance from the public who suffer continued hardship day to day. Such a move would cause losses world-wide for those exposed to Greece and its banking system. Rumours abound that further Quantitative Easing is being prepared for the Euro in the wake of such events, which would further contribute to its demise in global perception.

But what do Europe’s woes mean for our investments? Firstly, UK investors are suffering from huge falls in their stock and bond values which have elements invested into Europe. In today’s globalised markets there is always a huge impact globally if any particular region crumbles.

As our largest export market, we will also experience continued drops in demand for our products and services from Europe. Not only will European consumers have less disposable income but their weaker currency will also mean that our exports become expensive.

Hold some physical gold in your pension

It seems then that 2015 could provide Gold’s perfect storm

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so it makes sense to hold some tax free gold coins to diversify away from Sterling and receive better returns than deposit rates. Gold has outperformed inflation in 8 of the past 10 years, better than any other asset class and could again be one of the winning investments in 2015.

With pension freedom arriving this year, it also makes sense to allocate some of your pension pot to physical gold bullion. That way any market volatility will be ironed out by gold’s safe haven status, meaning protection for your pension value and predictability for the year ahead.


How does the falling oil price affect gold?

One of the most significant headlines in financial markets over recent months has been the dramatic fall in the oil price to $50 a barrel. But is there a direct relationship with gold and will a sustained low oil price drag down the price of precious metals?

Share prices tumble

With the FTSE 100 index heavily weighted towards oil, the continued fall in oil prices has pulled the index lower in value too. It’s been a hugely volatile period for equities but not all of this turbulence can be solely credited to plummeting crude prices. European stocks have dropped dramatically due to concerns that Greece’s upcoming election will lead to the Hellenic Republic leaving the Euro and its austerity promises behind. The consequence would be considerable debt write-offs for many institutions and investors and reported Quantitative Easing by the EU in an attempt to prop up the floundering region. Similarly, the recent terror strikes in France, with additional threats globally has put further pressure on the stability of equity markets.

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Clearly the gold price has benefited from these falls. As the traditional safe haven investment, many investors have switched into gold to protect against the volatility. However, oil can’t be granted full responsibility for the equity turbulence as markets still struggle with the fallout from the ongoing global financial crisis.

Falling oil price has led to lower petrol prices

Petrol prices have fallen from £1.27 / litre in November to around £1 / litre now. In theory, this should put more money into consumers’ pockets – driving up the economy and gold down. However, the fall in the pump price doesn’t get close to reflecting the fall in the oil price as so much of the petrol price consists of tax. This effect has diluted oil’s impact. With other factors still holding the economy back like low wage increases, lower petrol prices alone aren’t enough to spark an economic surge.

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Cheaper production costs

With the oil price tumbling, it isn’t only consumers who could benefit from lower fuel prices, but corporations too. Anything which requires transport could see costs fall while the oil price remains low. It’s just doubtful that companies will choose to pass any savings onto consumers. Gold mines have struggled over the past 18 months with gold’s price falling below the cost of production. With oil making up a substantial element of their fixed costs, many may perceive the low crude price as the saviour they needed. Lower oil prices could well end up keeping some mines in business who may otherwise have shut down – maintaining gold’s supply source. However, with such lean times recently for the gold miners, it is unlikely that low fuel costs will be passed on as lower gold prices as they seek to make up lost revenue during the recent mine squeeze.

Gold up 5% this year

Despite oil’s fall, and prediction to continue falling towards $40 a barrel, gold has started the year robustly. While it’s risen strongly in Dollar terms by 5%, its performance in Sterling is even better at 7%. Not bad in a fortnight. This demonstrates that while oil has some degree of impact on the gold price, it is impossible to draw a direct correlation. There are simply too many other factors at work.

Indeed, some of those who may suffer the most by the falling oil prices are the Russians and some Middle Eastern producers. These are the very same investors who have provided the impetus for the UK economy by focusing much of their investment in the UK. Take away the momentum from these guys, and the UK economy may yet be pulled back, sparking another rush towards gold. So while the Ukraine invasion may not have made an immediate impact on your gold investment, it may well be doing now.