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We Need To Talk About Gold: The Price Surge

Tom Burroughes, Group Editor , 3 August 2020

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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.  
 

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