A coming gold surge?

After a nasty slide in 2013, gold has found its feet again, gaining almost 10% this year to around $1,340 an ounce. Some investors have sought shelter from emerging-market turmoil in the metal, while fears that the weather might not be solely responsible for the weak recent run of data in America have also helped.

What’s more, the Bank of England and the US Federal Reserve have both made it clear that interest rates will stay low for a long time, which has reawakened fears that “central banks will stay too easy for too long”, says John Authers in the FT.

Central banks mis-steps, and other reasons to fear that inflation could make a comeback in the next few years, mean that investors should keep around 5%-10% of their portfolio in gold as an insurance policy. But for now, the upside looks limited.

On the plus side, many gold mines become unprofitable at around $1,200, implying that supply will begin to shrink and bolster prices. Growing emerging-market demand for gold for jewellery and investment also helps establish a floor for the price.

But rising US real interest rates “will remain a powerful headwind against gold”, says Capital Economics. As the US and the global economy recover, the US central bank is set to wind down its money-printing programme and eventually raise interest rates.

Higher real interest rates are always bad for gold as it yields nothing and so becomes less appealing compared to interest-bearing assets.

Gold can climb a bit further in the short term (Capital Economics sees scope for a rise to $1,450 by the end of the year), but if there is another surge to record levels as inflation returns, it will be a few years away.

Merryn

Claim 12 issues of MoneyWeek (plus much more) for just £12!

Let MoneyWeek show you how to profit, whatever the outcome of the upcoming general election.

Start your no-obligation trial today and get up to speed on:

  • The latest shifts in the economy…
  • The ongoing Brexit negotiations…
  • The new tax rules…
  • Trump’s protectionist policies…

Plus lots more.

We’ll show you what it all means for your money.

Plus, the moment you begin your trial, we’ll rush you over THREE free investment reports:

‘How to escape the most hated tax in Britain’: Inheritance tax hits many unsuspecting families. Our report tells how to pass on up to £2m of your money to your family without the taxman getting a look in.

‘How to profit from a Trump presidency’: The election of Donald Trump was a watershed moment for the US economy. This report details the sectors our analysts think will boom from Trump’s premiership, and gives specific investments you can buy to profit.

‘Best shares to watch in 2017’: Includes the transcript from our roundtable panel of investment professionals – and 12 tips they’re currently tipping. The report also analyses key assets, including property, oil and the countries whose stock markets currently offer the most value.