A coming gold surge?

While gold may well climb higher in the short term, a price surge could be years away.

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.

Recommended

The charts that matter: the start of the big crash?
Global Economy

The charts that matter: the start of the big crash?

US tech stocks fell further this week, more than 10% down on their November high. There’s what happened to the charts that matter most to the global e…
22 Jan 2022
Oil price hits seven-year high after Abu Dhabi attack
Oil

Oil price hits seven-year high after Abu Dhabi attack

The oil price hit a seven-year high after Houthi rebels in Yemen staged a drone attack on an oil storage site in Abu Dhabi.
21 Jan 2022
Industrial metals: electric vehicles are driving a boom in prices
Industrial metals

Industrial metals: electric vehicles are driving a boom in prices

The soaring popularity of electric vehicles is pushing up the price of the industrial metals that make up the batteries.
21 Jan 2022
What will happen to the price of gold in 2022?
Gold

What will happen to the price of gold in 2022?

Gold is traditionally the go-to asset during inflation. But with inflation at 30-year highs, it has gone nowhere. Dominic Frisby investigates why, and…
20 Jan 2022

Most Popular

Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022
US inflation is at its highest since 1982. Why aren’t markets panicking?
Inflation

US inflation is at its highest since 1982. Why aren’t markets panicking?

US inflation is at 7% – the last time it was this high interest rates were at 14%. But instead of panicking, markets just shrugged. John Stepek explai…
13 Jan 2022