The past six months have seen a surge in the price of gold, with the current price of around $2,011/oz being within touching distance of the all-time high of $2,067/oz seen in August 2020. Gold has historically been seen as a safe haven, a store of value and a hedge against inflation, but with inflation expected to moderate in the coming months, is there likely to be continued support for the yellow metal at the current high prices?
Gabriella Macari, a chartered wealth manager at investment platform Tillit, says there is a disconnect between the case for investing in gold for retail and professional investors. “For a lot of retail and DIY investors, gold represents the flight to safety – they know what it is, and it has always been considered a safe haven asset,” she explains. “From a professional investor angle, there are more calculated reasons to buy gold: questions around the correlation between gold and the US 10-year Treasury yield and whether it acts as a proxy; supply constraints and rising demand.”
Macari adds that the emotive connection retail investors may make between gold and safety is not always the right call: “Investors who are interested in gold as a haven should be mindful that it does not pay a yield and it can also be more volatile than people think: if you miss a sudden uptick in the price, you could lose capital.”
While UK investors seeking a safe harbour for their capital may be at least as well served by short-dated government bonds as by a physical asset with prices nearing an all-time high, Ian Williams, manager of the Charteris Gold and Precious Metals Fund, says the tangibility of gold is an important factor underlying one of the biggest sources of current demand: central banks in the BRICS and beyond.
“For physical gold bullion, the buyers are largely Asian central banks, which are purchasing huge amounts of gold even when prices ae close to an all-time high in virtually any currency you look at,” he explains. “The GDP (at purchasing power parity) of the BRICS countries – Brazil, Russia, India, China and South Africa – recently overtook that of the G7, and there has been a lot of talk about Russia and China setting up a new reserve currency, which would be backed by gold.” He notes that both Russia and China have sold down holdings in US Treasuries over the past decade and replaced them with gold, and with many countries in the global south applying to join the BRICS forum, it makes sense for them to follow suit.
For Williams, the way to play the soaring gold price when the physical commodity is subject to such high demand is to buy shares in mining companies. “Despite the surge in the gold price, no-one has been buying miners at all until very recently,” he says. “Mining shares are ridiculously undervalued versus where gold is today, never mind any further upside. That arbitrage represents a massive opportunity, and it will not go unnoticed for long; and if equity investors will not buy gold miners, the corporate sector will.”
Ned Naylor-Leyland, manager of the Jupiter Gold & Silver Fund, owns a mix of physical gold (via ETFs) and mining shares. He too has noticed an uptick in corporate activity in the mining sector, which he argues may only be the tip of a golden iceberg if the physical gold price continues to rise. “Over the last five years we have seen higher deal volumes in the sector, with much of the merger and acquisition activity taking place between 2019 and 2021,” he says. “Gold miner M&A activity started 2023 with a bang. So far, we have seen the world’s largest gold producer, Newmont Gold, place a $17bn bid for Newcrest [increased to $19.5bn on 11 April], and B2 Gold make a move on Sabina Gold & Silver.
The Newmont/Newcrest proposition, if successful, will mark the largest takeover in Australian corporate history, and it looks to have marked the beginning of an exciting new phase for the gold market.” Naylor-Leyland believes that more major gold producers will look to consolidate in a meaningful way once the gold price clears $2,100/oz as the boards of these major producers are pushed by generalist investors to resolve their growth problems. “The potential synergies from lowering costs and diversifying operations through acquisition may also motivate boards to act sooner rather than later,” he adds.
So gold mining shares could offer upside while physical gold is highly priced and increasingly hard to get hold of – but what of the ‘safe haven’ argument in a time when both interest rates and inflation are falling? Macari says that while gold is often seen as the ultimate inflation hedge, investors should be aware that history does not always repeat itself. “Historical data shows gold has been a good hedge against inflation, but if you think back to previous periods of high inflation, such as the early 1990s, there were not as many other options as there are now.”
She picks out infrastructure, which has only really reached the investing mainstream in the past decade or so: “If I can have inflation-linked income from infrastructure in my portfolio, is that better than a non-income generating precious metal that is quite price volatile? If you go back to the pandemic, it was a good time to buy gold as interest rates were so low, but if I was looking for a safe haven now, I would probably be considering some high-quality government or really high-quality corporate bonds that are going to give me a yield.”
Interestingly, all three managers point to silver as offering an alternative; it is more ‘useful’ than gold given its industrial applications, and at $25/oz, the price is some 50% below the all-time high, versus only about 5% for gold. “In bull markets for precious metals, gold goes up first but silver goes up more,” says Williams. “I am happy having quite a heavy weight in silver as when it works, it works big time.”