Alt Investments
We Need To Talk About Gold: The Price Surge
The gold price is flirting with the $2,000 per tonne level and a number of forces have been pushing up the price in recent months. This classic safe-haven asset is in play during nervous times. And massive central bank money creation has stoked worries. What role does it play in portfolios?
Gold prices are on fire at the moment, flirting with $2,000 per
ounce in physical bullion as nervous investors become concerned
about a second spike in coronavirus. And data shows that for many
investors, there’s plenty of room for gold in their portfolios,
industry figures say.
The gold price has risen by 17 per cent in dollar terms over the
first half of this year.
As reported by BullionVault, a
specialist firm, spot prices for physical bullion delivered in
London eased slightly at one point late last week after US
Federal Reserve chairman Jerome Powell said he would do what was
necessary to prevent the US economy from a slump. But the gold
rally may continue. In the words of the World Gold Council’s
Louise Street, the pandemic created “the perfect storm” for gold
investment. Global interest rate cuts and central bank cheap
money have cut the cost of carrying gold.
And Street’s colleague at the industry group, Juan Carlos
Artigas, told this publication that there have been big inflows
in to the yellow metal this year so far. “Year to date there has
been close to $50 billion of inflow into the gold market via
physically backed ETFs. This is a global phenomenon,” he
said.
But this is a complex market, with consumer as well as investment
forces in play. In its second-quarter report on the market,
issued a few days ago, the World Gold
Council said Q2 gold demand actually fell 11 per cent
year-on-year to 1,015.7 tonnes. While some elements of public
policy have lifted the price in the market, COVID-19 has
interfered with consumer demand for gold (such as jewellery). On
the other side, there were “record flows” of 734t into
gold-backed ETFs [exchange traded funds).
The WGC’s Artigas said getting a clear handle on gold requires
people to understand that it has a dual nature. It is an
investment asset and as a medium of exchange (money) and as a
consumption item (jewellery, industrial uses). This dual nature
is important because gold can both be used to hedge certain
market risks and moves and also can be an asset that is driven by
the economic and market cycle.
Gold’s role as a portfolio diversifier, because of its
low/negative correlations to other asset classes, is certainly
getting plenty of attention in the current fraught environment.
And there’s plenty of room for gold in portfolios of high net
worth individuals, he Artigas said.
“Across all portfolios around the world, gold is only 1 per cent
of the total. However, this is not evenly spread out. There will
be some investors – we estimate that approximately 20 per cent in
total – who hold between 3 and 5 per cent of assets in gold and
only a small percentage holds more than 5 per cent. The vast
majority has very little or no exposure to gold. Gold is
accessible to all investors,” he said.
Compelling
“The rationale for higher gold prices has rarely looked quite so
compelling and the stars are neatly aligned for it ... whether it
is US treasuries dipping below 60 bps (giving deeply negative
real yields), a dollar correction, growth in MS money
supply, the China/US spat, equities seemingly disconnected from
the real economy, debt levels ... the list is endless,” Ross
Norman, chief executive of MetalsDaily.com, said. “That
silver rallied 6 per cent while gold rose 2 per cent is
interesting. Times when silver leads and in a leveraged form is
normally an indicator alone that the macro economy is in deeply
poor shape. In the LBMA gold forecast in Dec 2019 we said gold
would achieve an all-time high and hit a high of $2,080 - it has
been quicker than we had expected.”
The market is being pulled in different directions, industry
figures say.
“Gold’s global demand has fractured like never before as the
Covid Crisis crushes household purchases while spurring record
inflows from investors. This shift, away from gold for adornment
and towards gold as a must-have store of value, was already
underway before the pandemic, and it looks likely to accelerate,
because the bleak outlook for household incomes is being met by
massive government and central-bank stimulus, raising fears of
inflation even as economic growth fails to revive,” Adrian Ash,
director of research at BullionVault, said.
A certain background
The World Gold Council’s Artigas said his views are helped by a
background around the debt market sector. Artigas joined the
organisation a decade ago, having previously worked in JP
Morgan’s fixed income team. That experience means he views gold
as part of a wider asset allocation and investment universe
rather than some odd or exceptional area. “It [his background]
has been quite helpful….when we look at gold in a portfolio we
look at how it interacts with other assets.”
“We don’t give investment advice but give investors a lot of
information and insights,” he said of the WGC.
There are four important considerations around gold, he said.
These are returns; diversification (touching on the key issue of
correlations); liquidity, and improved portfolio performance.
“Many assets can be diversifiers but they are not very efficient
about it. And we often find that in times of stress correlations
[of many asset classes] go to one. Historically gold has had low
correlations to the stock market in times of stress and
correlations have actually gone negative,” he said.
“We are having more conversations with institutional investors,
such as pension funds in North America and Europe and Sovereign
Wealth Funds about the diversification benefits of gold. Even
though the stock market has recovered from the lows this year
people are concerned…some of that stock market performance is not
driven by fundamentals but by very low interest rates,” he
said.
The WGC has built “Goldhub” a comprehensive website of the
organization’s data, research and insights into various aspects
of the gold market. One of the key elements of Goldhub is
Qaurum, an online analytic tool that helps investors understand
how gold may perform under various macroeconomic scenarios.
Lombard Odier,
the Swiss private bank, recently
explained why the gold price has been rising.
Rising demand for gold-based exchange traded funds