Advertisement

Gold is poised for a new bull market

The price of golf has hit a six-year high, breaching the $1,400 an ounce level not seen since August 2013.

Gold Bars and Coins
Central banks in emerging markets have been adding to their gold holdings

For an asset often dismissed as a "barbarous relic", gold is doing pretty well, says Randall Forsyth in Barron's. It has hit a six-year high, breaching the $1,400 an ounce level not seen since August 2013. This marks a breakout from a trading range it has been stuck in since 2013, when it had fallen back from the record peak above $1,900 it reached in 2011.

Advertisement - Article continues below

What's more, because the dollar has been strong in recent years, gold is looking even better when priced in other currencies. Trading around £1,127 early this week, gold is now within striking distance of its £1,178 per ounce sterling all-time high. As Charlie Morris of Halkin Services notes, it has now made all-time highs in Australian dollars reaching A$2,000 an ounce this week and is only about 3% off that mark in euros. This gold rally "has breadth".

A sea of troubles

Forget cryptocurrencies: investors are now turning to a much older and better-established expression of "distrust in government-issued paper currencies", as Forsyth puts it. People are always inclined to top up their gold holdings when the news is bad, and there are plenty of worries to justify holding a metal widely seen as the ultimate safe haven.

Advertisement
Advertisement - Article continues below

Repeated confrontations between the White House and Iran have raised worries about war and the security of global oil supplies, while a resolution to Donald Trump's trade war with China remains a distant prospect. The world economy also appears to be turning down, with data in all major regions undershooting expectations recently. Furthermore, central banks' response to the slowdown should give the gold rally additional impetus.

Even easier money

Not too long ago everyone was braced for higher interest rates. Now it's a different story. The world's central banks spent last week "embracing easier monetary policy", says Michelle Jamrisko on Bloomberg. A dovish turn in its language meant that the US Federal Reserve got as "close to a rate cut as possible" without actually "executing one". Indeed, the debate now is over "how big the rate cut will be", adds Justin Lahart in The Wall Street Journal. Some economists are forecasting a quarter of a percentage point reduction next month, others are betting on half. Yet with the benchmark US short-term rate at 2.25%-2.5%, "rates are low to begin with". Lower US interest rates make dollar-denominated investments less attractive, which drives down demand for the greenback relative to other assets. As gold is priced in dollars, a weaker US currency means a higher gold price. The new wave of central bank dovishness is broad based. In Europe, Mario Draghi also hinted at more rate cuts and bond buying. Brazil held interest rates at a record low, while Australian central bankers said that further monetary easing down under is "more likely than not".

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

Lower interest rates worldwide are another tailwind for gold. Unlike equities and bonds, the yellow metal pays its holders no income. That is usually a significant drawback, but with bond yields plunging to new depths they are negative in Germany and Japan gold looks increasingly attractive on a relative basis.

The ultimate inflation hedge

Easier monetary policy also increases the risk of higher inflation, which boosts gold as it has maintained its real value for thousands of years. Markets appear to be underestimating the risks of an inflationary scare. Lowering interest rates "when they are too low already doesn't strike me as a brilliant idea", writes Charles Gave of Gavekal Research. Over the last decade, "the world's central bankers have made an astonishing discovery". They think that they can "print as much money as they want, and even non-stop printing will have no inflationary impact". Yet the laws of economic gravity have not been repealed. Investors nervous that history will eventually "rhyme" should "replace bonds with gold in their portfolios" and be more wary of stocks.

Advertisement - Article continues below

So where might inflation come from? Tight labour markets. US and UK wage growth have both reached post-crisis highs in recent months. Unemployment in the UK continues to bob around 44-year lows, which should give workers more bargaining power to negotiate wage rises. Last year may have seen the US hit "peak graduation", says Brian Pellegrini of Intertemporal Economics, quoted in the Halkin Letter. That implies a squeeze up ahead in the supply of high-skilled workers. In Europe the labour market is also tightening. Half of Poland's companies are reporting recruitment difficulties and remuneration growth in the Romanian manufacturing sector is at a ten-year high.

Plenty of room in the market

Another reason to be bullish is the scope for prices to jump once investors notice the upswing and try to cash in on it. Gold exchange-traded fund (ETF) holdings were equivalent to 1% of the US equity market at the metal's 2011 peak, notes Morris. Yet that figure is now down to 0.3%, meaning the market is comparable to the market capitalisation of Starbucks. "Gold doesn't seem like a crowded trade to me."

The relatively small size of the gold market means that prices can move quickly. SPDR Gold Shares, the largest bullion-backed ETF, saw $1.6bn of inflows last Friday, "the most since its inception in 2004", notes Bloomberg. Central banks in China, Russia, India and Turkey have increased their gold holdings by two-thirds since 2015 as they try to diversify away from dollars, adds Lex in the Financial Times. These new buyers will all help support the gold price. The stars, then, are aligned for a lasting upswing in gold. We continue to advocate holding 5%-10% of your portfolio in the yellow metal. One way to profit from a bull market is the ETFS Physical Gold ETF (LSE: PHAU).

Advertisement
Advertisement

Recommended

Don’t panic about Iran – but don’t sell your gold either
Gold

Don’t panic about Iran – but don’t sell your gold either

Markets have reacted calmly to the tension between the US and Iran. But don’t get too complacent. It’s still a good idea to hold on to some gold as in…
9 Jan 2020
Here’s how gold could rise above $7,000 an ounce
Commodities

Here’s how gold could rise above $7,000 an ounce

That the gold price could hit $7,000 an ounce is a logical and plausible possibility, says Charlie Morris. Here, he explains how it could get there.
30 Dec 2019
Gold is in a bull market – and it could have much further to go
Commodities

Gold is in a bull market – and it could have much further to go

Many investors forget that gold is still the best-performing asset of this century, says Charlie Morris. It could also have much further to go.
27 Dec 2019
All the gold in China: money and power goes east
Economy

All the gold in China: money and power goes east

China has far more gold than official figures suggest – as much as America, in fact. He who owns the gold makes the rules, says Dominic Frisby.
15 Nov 2019

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Don’t despair on dividends – these companies could be set to bring them back
Income investing

Don’t despair on dividends – these companies could be set to bring them back

The value of dividends paid out by UK stocks has plummeted this year as companies “rebase” their payment policies. But things could soon start to look…
6 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020