Why gold may still be a good investment – despite record highs

“There is no honest man — not one — that can resist the attraction of gold!” The words of comic playwright and writer Aristophanes are some 2,500 years old but are as true today as they have ever been.

Gold is typically the place to be going into a crisis, due to its defensive qualities and lack of correlation to equities and bonds. The Covid crisis of 2020 is a classic example – we saw the fastest crash in history as a falling US dollar and a drop in real yields – meaning you could lose money on government bonds and even cash over time – put investors in an unenviable position.

The World Gold Council reported record flows into gold-backed ETFs of 734 tonnes in the first six months of 2020*, fuelled by rate cuts and liquidity injections by central governments. Gold is something investors run to when it looks like the world is heading to hell in a handcart. It was a similar story in a tough 2022 – when global equities fell some 8%**, the price of gold was roughly flat.

Recent moves have been more incongruous, on the one hand we have geopolitical and economic tensions – but we also have to remember the precious metal tends to underperform in higher interest rate environments because it doesn’t pay an income.

But 2023 (and the start of 2024) have seen a slight change in this traditional behaviour. The price of gold rose 13.1% in 2023***. It should be noted that a big chunk of that performance came in Q4 (when it became clearer we had reached peak interest rates), but the interesting point is the performance in the second and third quarters – when the asset class fell 2.5 and 3.7% respectively***. Essentially, gold was remarkably resilient at a time when there were real fears about how high rates would actually go.

As of writing, the price of gold is at record highs, having recently broken through the $2,200/oz barrier****. Those highs would typically worry investors, but there are a host of reasons why there may be more scope for the yellow metal to scale further heights in 2024.

Five reasons investors may want to consider

1. ETFs buyers are still on the sidelines

Gold-backed ETFs account for a significant part of demand for the gold market. In January, figures from the World Gold Council showed global physically backed gold saw outflows of $2.8bn – this was the eighth consecutive month of outflows^. Last year, global gold ETFs saw a third consecutive annual outflow, losing 244t^. Should we see any change in this momentum it would be a significant driver of the gold price – as is highlighted by the aforementioned backing of gold ETFs following the Covid crisis in 2020.

2. Central bank buying is offsetting these ETF outflows

These outflows from ETFs are thankfully being offset by central banks continuing to buy bullion in record amounts. According to World Gold Council Global Head of Central Banks, Shaokai Fan, central banks have been buying historic levels of gold in the past two years and continue to be strong buyers in 2024. This has also helped offset rising interest rates and inflation (which we will discuss in a moment).

China and Russia have tended to be the biggest backers of gold in the past decade. However, while China continues to be the largest buyer – in part due to its weak economy – the purchases by central banks have begun to diversify, with the likes of Poland, Singapore, Libya and the Czech Republic among the top buyers in 2023^.

3. Rate cuts

There is a strong consensus that we have reached the peak in terms of rate rises to stave off the threat of inflation. In fact, the recent Federal Reserve meeting was the clearest indicator yet that rate cuts may be coming, with the US often used as a guide for other central banks to follow.

Jupiter Gold and Silver manager Ned Naylor-Leyland says gold is always forward looking and therefore has already largely digested a reduced outlook for rate cuts from the Fed in 2024. He also says there’s growing anticipation in the markets regarding the Fed’s expected transition towards a more accommodative monetary policy stance, which is why gold has started trending higher recently^^.

We can still expect further movement once it becomes a reality. WS Amati Strategic Metals manager Georges Lequime says while consensus is the Fed will cut rates in 2024, the question is whether this is on the back of lower than expected inflation or a weakening economy.

He says: “Under both scenarios gold and silver prices should do well judging by the rallies that we have historically witnessed following the end of a rate cycle.”

Find out more about Ned Naylor-Leyland’s thoughts on gold as a tool for diversification in his recent ‘Investing on the go’ podcast interview here.

4. The significance of the $2,150 barrier

As of writing, the price of gold only recently passed $2,150 mark, a point that Ned believes could have a significant impact, particularly for gold equities. Gold miners have generally disappointed for a long time and have struggled to make their cost of capital, with inflation not helping in this respect. However, miners can offer more upside in a bull run for the metal, particularly when projects which weren’t viable suddenly become viable again as the price rises.

He believes investors have been waiting for gold to reach a meaningful breakout above $2,150/oz, adding that the lack of participation has negatively affected gold equities more than bullion. “We see a brighter picture once $ gold break above $2150/oz as there is plenty of sensitivity in play and net asset value and free cash flow multiples are as low as we have seen them since the fund launched in 2016,” Ned adds.

5. Geopolitical tensions

The final point is that gold is often an effective predictor of geopolitical risks, and typically appreciates in value in periods of heightened geopolitical tensions, as is clearly the case at present, further supporting a strategic allocation to the asset class.

So how high can gold go?

Ninety One Global Gold fund manager George Cheveley also believes there is more headroom for the asset class, adding that the price has been held back by the Federal Reserve rate rises for the past 18 months. He believes the combination of rate cuts and geopolitical tensions are encouraging many central banks to increase gold holdings, partly as a way of diversifying away from US dollar holdings into an asset that can be held domestically. In short, the risks to global gold prices are skewed to the upside^^.

Research from JPMorgan believes the asset class could peak at $2,300/oz by 2025, although this prediction assumes a Fed cutting cycle initially delivering 125 basis points of cuts over the second half of 2024, pushing gold prices to new nominal highs^^^.

Investors wanting access to physical or gold equities beyond some of the specialist funds mentioned above might consider a multi-asset portfolio such as Orbis Global Balanced, Jupiter Merlin Balanced or WS Ruffer Diversified Return which all currently have an allocation to gold^^^^.

*Source: World Gold Council, 30 July 2020

**Source: FE Analytics, total returns in pounds sterling, 1 January 2022 to 31 December 2022

***Source: Invesco, gold report, Q4 2023

****Source: BullionVault, figures in USD, at 21 March 2024

^Source: World Gold Council, January 2024

^^Source: fund commentary, January 2024

^^^Source: JPMorgan, 17 January 2024

^^^^Source: fund factsheet, 31 January 2024