In times of heightened market volatility, low interest rates and rising inflation, which asset class offers the most protection for investors?

Angelos Damaskos

CEO, Sector Investment Managers

 The excesses of the 1980s and 1990s culminated in the great crisis of 2008. As the developed world grapples with the ensuing debt problems, some smaller countries are on the brink of default. Even the richest country in the world, the US, is struggling to manage its budget deficit, high unemployment and rising inflation.

For the politicians, it seems the only way out is to print money, allowing their currency to devalue and thus making it easier to pay back debt. Combined with interest rates near to zero, the appeal of cash in the bank is low. Under these circumstances, gold is shining as a long-established store of value and a safe haven – indeed its recent rise has transformed the prospects of gold mining companies.

General market weakness nevertheless, has kept shares prices low, offering an outstanding opportunity to invest idle cash in assets that should be closely correlated to the safe haven.

Chris Bowie

Head of credit, Ignis Asset Management

In times of extreme market distress, gold is the true safe haven given the limited quantities of it that exist. Therefore it is physically real and real in the inflation protection sense status. But given it has a negative yield (cost of insurance and storage) is the best safe haven?

Alternatives could include cash deposits, t-bills and ‘risk-free’ government bonds, but are they really safe havens too? The banking crisis in 2008 showed that deposits are certainly not safe when you have a run on a bank, so they must be discounted. Similarly the current risks of default in Greece show that the notion of ‘risk-free’ in government bonds is a non-starter.

Even if you discount the possibility of losing no actual hard cash in the case of Greece, in real terms you could still lose significant capital from any government action that inflated away the real cost of debt over time (such as Greece leaving the euro and de-basing its new currency).

T-bills given their short dated nature therefore diminish the inflationary risk from fiat currency backed issuance, but they are not immune to inflation even with 3 month or in extreme overnight maturities – in a hyper-inflation world you would still lose significant real wealth.

Ultimately, if you believe we are headed for a world of financial distress and hyper-inflation (I don’t), despite problems of portability and negative yields, gold remains the true safe-haven.

Bradley George

Co-manager, Investec Enhanced Natural Resources fund

Gold has been one of the main beneficiaries of the ongoing market turmoil as investors flee to safe havens. As the US dollar continues to depreciate on the back of the US credit rating downgrade, the price of gold rose by 12.7% to approximately $1,825 per ounce (/oz) and reached highs of $1,900/oz in early September.

These moves mean gold has reached nominal highs, although it should be noted that gold has yet to climb to the record real highs of the 1980s. Despite the fact that gold is seen as a safe haven, the new notional dollar purchases are only in the tens of billions over the last few months, yet they had a 40% impact on the price i.e. it has only seen a fraction of what liquidations may have occurred in other asset classes.

This gives an indication of what the market could do if real asset allocation flows start to take place. In other words; although the current rally may be in the process of a consolidation following a strong move during August, putting gold up 28% year-to-date, we do not believe this is by any means close to the end game for gold.

There is a growing loss of confidence in fiat currencies in the current political environment where competitive currency measures are being introduced across the board. This, in combination with European sovereign debt problems, should continue to support investor demand and most likely central bank demand for reserve diversification into gold.