Gold is going through a phase of price momentum which has persisted since the strong end to 2023 and has put it back into investors’ minds.
Several strategies – from multi-asset portfolios to absolute return funds – are looking at the precious metal and related investments with renewed interest despite the spikes in price. At the end of 2023, an ounce cost a record $2,135, which was beaten again in March with a new all-time high of $2,141 per ounce, surging roughly 16% in the past year.
This increase is atypical in the history of gold, which usually stayed in the doldrums when interest rates were rising. When savers can make decent returns in cash – why own a non-yielding, speculative asset such as gold?
It has not all been plain sailing over the past few years. Gold funds disappointed in February 2023 as Westerners cashed in on the new highs, BullionVault director of research Adrian Ash explained on Trustnet.
Yet the price has continued to rise despite interest rate hikes around the world as fresh impetus has come from elsewhere.
Barry Norris, manager of the Argonaut Absolute Return fund, explained: “Geopolitical conflict and the confiscation of €300bn of Russian assets means that the central banks outside of the Western financial system are going to hold assets which provide a store of value but are not going to be confiscated,” he said.
“China, Russia or any of the other countries that consider themselves outside of the Western bloc, such as Brazil and India, aren’t buying treasuries anymore, they're buying gold as an alternative currency.”
But these aren’t the only buyers, as David Waugh, analyst in Neuberger Berman’s quantitative and multi-asset strategies team, noted. Poland, for instance, was the second-largest gold buyer last year after China and is planning to further increase gold reserves as a percentage of total reserves.
And demand is robust beyond central banks too – for the first time Chinese buyers are driving up the price, fuelled by the underperformance of other investment options such as property markets and Chinese equities. This has redirected focus towards gold.
This is but one of the reasons why Waugh takes a long-term bullish stance on the precious metal, and there are “multiple tactical considerations” to be positive in the short term as well.
“A major recent short-term driver of gold’s rise is the Federal Reserve's dovish shift, as interest rate cut expectations firm up for this year,” he said, which will “inject additional liquidity into the market”.
“Also, should the low-probability risk of a recession gain traction, gold stands as a prudent economic hedge.”
Kelly Chung, chief investment officer at multi-asset Value Partners Group, agreed, noting she was also positive in the medium-to-long term, even though the “very rapid” price surge will also mean that “a correction is imminent”, she said.
Norris himself is finding opportunities in the unloved gold–mining equities, which constitute about 10% of the Argonaut Absolute Return portfolio.
“The gold miners are geared to the gold price and over the past 12 months, the price has done a lot better than the miners, so their equities have de-rated substantially and are now looking quite cheap, probably for the first time in my investment career,” he said.
“These are long positions on paper, but actually they probably do best when the market goes down.”
AJ Bell investment director Russ Mould added that a “wave” of mergers and acquisitions in the gold miners space has so far “failed to fire investors’ interest”.
“But the gold miners themselves may see an opportunity, especially as [their share prices] remain depressed and their profit margins and cash flows should benefit if the gold price maintains its current trajectory,” he said.