Having topped $2,000 an ounce for the first time in early August, gold is the asset class of the moment as investors run for cover to tackle the almost unprecedented market uncertainty.
Who could blame them given there are very few options on the table? Investors are faced with a falling US dollar and a drop in real yields – meaning they could lose money on government bonds and even cash over time.
Gold has never looked so attractive – but that is now showing in the price, which has risen by some 36%* since its lows in March. But there are lots of commentators who believe there is significantly further to go in this gold rally, with Citigroup predicting the price could go as high as $2,300 by mid-2021, while Bank of America Merrill Lynch has said it could reach $3,000 by early 2022.
Gold is typically the place to be going into during a crisis due to its defensive qualities and lack of correlation to equities and bonds. The question is whether it is still an attractive buy at $2,000 an ounce.
Central bank stimulus and lack of inflation make gold attractive
History would suggest no, but the unique nature of this market does counteract that argument to some degree. For example, we’ve seen billions of dollars of new money printed in the past few months by central banks to provide a strong response to the impact of Covid-19 on the economy – a similar amount to that used to tackle the global financial crisis. Yet we have not seen (and are unlikely to see in the next 12 months) any significant sign of inflation – while it has also failed to devalue any of the existing money in the system. Both of these factors support the argument for gold.
A recent investment note from Schroders highlighted the position of gold now versus its previous high in 2011, with some notable differences which indicate we may not be in bubble territory.
Some of the principal differences included gold not being as widely held in investor portfolios or in ETFs, while the nature of its price rise in 2020 is totally different to 2011 when gold surged around 15% in the month before the peak**.
ETF exposure is not yet at previous highs
ETF exposure is one area of particular importance. According to the note, only 2.5% of total ETF holdings globally are currently in gold compared with 10% in 2011. However, the upsurge has been quite aggressive with 643 tonnes added to physical gold ETFs so far this year, compared with 372 tonnes added in all of 2019 (the record is 665 tonnes in 2009)**.
If you’re not a goldbug, there are other reasons to be cautious beyond price. For example, how long do you hold an asset which does not yield a dividend for? We all know that the best way to make money from the stock market is through re-investing dividends back into your holdings.
No yield versus negative yield
David Coombs, co-manager of Rathbone Strategic Growth Portfolio, counteracts this argument by pointing to the fact that with negative interest rates on various bonds, you’re actually paying some governments to lend them money. He says when you are selling these negative yielding bonds to buy gold, in a way you are increasing your income – with no yield versus negative yield.
David – who holds an allocation to gold in the diversifiers bucket of his portfolio – says it is a good hedge against disinflation, a valuable benefit these days considering he thinks we’re in for another decade of disinflationary headwinds.
People think of gold as a defensive asset, and that is and isn’t true – but gold is largely uncorrelated to the rest of the market, except in extreme periods. The Jupiter Merlin multi-asset team believe that itself is worth paying for in a diversified portfolio, regardless of price fluctuations. The Jupiter Merlin Growth fund has more than 10% in the asset class courtesy of two ETF holdings and exposure to the Blackrock Gold and General fund***.
A silver lining
The final point I’d make is that it is not only gold that has felt the benefit of this flight to safety since March. The price of silver has actually more than doubled, up 127%* in the same time period. Silver is a volatile commodity with a relatively small market compared to gold – this means relatively large flows in and out of silver can have a significant impact on the price of the commodity. This cycle historically repeats, and the price of silver can rise sharply over a relatively short period before crashing back down. As I mentioned earlier, gold is the place to be going into a crisis, by contrast silver has shown its best performance coming out of one.
A good option for those looking for access to both is the Merian Gold and Silver fund, managed by Ned Naylor-Leyland. The portfolio’s neutral position is 50:50 gold/silver, but Ned will manage the mix, adjusting the relevant weightings according to his view of the world.
In these unique times where global unemployment is likely to soar, and we expect far more bad news from the economy, the chances are we will see an increasing focus on safety and diversification – making the attraction for gold longer lasting. However, we have already seen a significant price hike, and although there may be more mileage, I feel the peak is not too far away.
*Source: Bullion Vault, gold and silver price in US dollars, 17 March to 13 August 2020
** Source: Schroders: Gold hits record high – but is it really too expensive?
***Source: Provider factsheet at 30 June 2020
