Business

Political and economic uncertainty creates a rush to buy gold

Gold prices soar as investors around the world hoard the shiny metal in uncertain times amid ultra-low interest rates.

In troubled times, investors behave 'like a herd of sheep,' says jewelry store owner

Renee Filippone digs into why the yellow metal is 'worth' all the fuss 2:14

Alec Van Rijk is a longtime true believer in precious metals, especially gold.

"I am putting on a daily basis a lot of my money into gold. I love gold. I like to trade in it and I have a lot of confidence in gold," said Van Rijk.

The self-described "gold bug" sits on a stockpile of gold bars and jewelry. At his jewelry store in Toronto he buys and sells gold daily.

Van Rijk says gold has an "instant" value.

"So the intrinsic value, I think, is there and I think the commodity is very stable. Much more stable than paper money," said the owner of Van Rijk Jewellers.

In fact, gold prices have long been volatile, but in an era of global political and economic uncertainty there is often a rush to buy gold.
Jewelry store owner Alec Van Rijk says he has been a 'gold bug' since the late 1970s. (CBC)

Directly following Britain's vote to leave the European Union, for example, the price of gold reached its highest level in two years, closing at $1,320 US an ounce, up $58.80 on that day.

"When there's instability in the world, everybody, it's like a herd of sheep, they just flock to gold," said Van Rijk.

RBC Capital Markets released a report in July forecasting the price of gold will reach $1,500 US an ounce by 2017, a value it hasn't seen in three years.

The report's authors are anticipating this higher price "as investors look to gold as a safe haven investment" at a time of geopolitical uncertainty and ultra-low interest rates.

Glowing through the ages

Our infatuation with gold dates back to ancient civilizations.

According to the World Gold Council, the first gold coins were created around 550 BC. Gold was used as currency in many countries before an eventual switch to paper money.

But is gold a good investment today?

'It doesn't have investment qualities.' — Eric Kirzner , finance professor, University of Toronto

"Gold is scarce, it doesn't corrode, it's got these magical qualities that people prize, the ancient Egyptians loved it, the Romans loved it," said Eric Kirzner, who teaches finance at the University of Toronto.

"It's been something that people have held for thousands of years, in fact. But it doesn't have investment qualities," cautions Kirzner.

He sees some value in having a bit of gold as part of an investment portfolio.

"It wouldn't be a bad idea to allocate on a permanent basis about five per cent to gold. The best way might be in the form of gold mining companies rather than gold, where you are getting some industrial exposure as well," said Kirzner.

Gold mining — a tough business

Gold mining companies are certainly benefiting from higher prices.

"We started to see investors call us August of last year, and these were people who hadn't owned gold or hadn't owned gold stocks for four or five years," said Sean Boyd, vice-chairman and CEO of Canadian mining company Agnico Eagle.

Boyd's company, which has been around for almost 60 years, has nine mines in Ontario, Quebec, Mexico and Finland that produce about 1.6 million ounces of gold a year. Boyd, of course, sees gold as a positive long-term investment.

"It's demonstrated to be a good thing to have over the last few years," said Boyd.

Agnico Eagle CEO Sean Boyd holds a 100-ounce gold bar. (CBC)

He admits he gets excited when the price of gold goes up, but too often he sees those who work in the gold mining industry falling into the boom-and-bust trap.

"When things are going particularly well they over-invest, they overspend, they do bad acquisitions. When things are not doing particularly well in the gold price they panic. They cut too many employees, they cut back on drilling. We tend to have worked opposite to that," said Boyd.

When the price of gold was dropping in 2013, Boyd's company was increasing exploration spending, buying investments in junior companies and buying deposits, growing their company by 60 per cent over the last five years.

"Gold can be volatile, so we've been in the business for a long time, you try to put that to the side," said Boyd.

Investors enticed

In August 2011 gold reached a record high of just over $1,900 US an ounce.

Concerns over debt in the United States and Europe enticed investors to buy gold. But by the end of that summer it was back to around $1,600 US an ounce.

In December 2013 the spot price of gold collapsed to $1,188 US an ounce due to an improving U.S. economy and an announcement by the U.S. Federal Reserve that it would cut back on buying bonds, signalling a return to more normal times.

But this year the price is up 25 per cent since January.

And with continued global political and financial uncertainty, RBC and others believe the shiny metal may remain on that upward trend for some time.

Global political and economic uncertainty often creates a rush to buy gold. (CBC)

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