As bank deposit rates drop to new lows and the equity market rebound makes shares pricey, investors are heading to gold, says Pie Funds chief executive Mike Taylor.
Since the Covid-19 crisis hit, gold has risen to record prices - in both New Zealand and US dollar terms.
Gold was being used as a safe haven investment again, Taylor said.
most recent peak was on May 18 at NZ$2964 an ounce.
In US dollars it peaked just last week above US$1780 an ounce.
"As we've seen in previous slumps – like the GFC – gold is coming back into play as a place to park cash," Taylor said.
Historically people have tended to see gold as a solid, defensive investment in times of crisis, it wasn't actually as safe as cash, Taylor said.
"The gold price is volatile, we call it a safe haven, it's a place to park money, but it's much more risky than cash and is more akin to equities," he said.
The incredibly low bank deposit rates are driving new interest in gold, Taylor said.
"Banks are actually flush with cash now," he said. That was down to a combination of the Government fiscal policy – which was keeping pay cheques coming into bank accounts - and Reserve Bank monetary policy, which had slashed the official cash rate launched a $60 billion quantitative easing designed to keep market rates down.
"In addition, during lockdown the savings rates went up substantially. If you couldn't spend any money it sat in the bank," Taylor said.
"That's allowing banks to say: well we don't need this deposit rate. So they can cut the deposit rates and that's allowing them to get a nice margin between the deposit rate and the lending rate."
Extremely low interest rates were a problem that other developed countries - particularly Europe - had been dealing with for some time, Taylor said.
"So with deposit rates at 1 per cent you have to go elsewhere to seek a return," Taylor said.
"Because if you are a retiree, or anyone else trying to earn a return off cash, there is no return really - after you take out tax."
"So that is encouraging us all to take some form of risk to get a return."
The upside was that could force investors to help the economy grow by investing in more productive areas – which central bank governors like Adrian Orr have been keen to encourage.
But with sharemarkets suffering from "vertigo" as investors surged back after March crash, gold was coming in to play.
On the face of it company earnings as at today didn't look good enough to justify some share market values, Taylor said.
"What equity markets investors are doing is looking 12 months out and saying we believe we'll be through this crisis and earnings will be well on the way to recovery," he said. "In addition we just have an unprecedented level of stimulus."
The US federal Reserve alone had put in about $5.7 trillion.
"All that money finds its way into investments."
- The Market Watch video series is produced in association with Pie Funds.
Economic recovery is coming but won't solve structural problems.