gold

It can hardly have escaped your notice: gold is hot! The gold price is currently breaking record after record, and even the ‘mainstream’ financial media can no longer ignore the yellow metal. But when I read these stories, they mostly raise a lot of questions for me. Are traditional investors really that naive now, or are they deliberately looking the other way?

Geopolitical tensions, inflation uncertainties, and high equity market valuations are driving a trend towards investing in gold.

Panic over banks and falling treasury yields have gold prices flirting with an all-time high again. In the short term, a quicker turn by the Federal Reserve may be the deciding factor, but the precious metal’s real success lies deeper. “Gold deserves a structural role in the portfolio.”

Gold prices briefly climbed past the 2,006 dollar per troy ounce level last week. With that, the August 2020 all-time high of 2,075 per troy ounce is getting closer.

Central bank gold reserves have risen to their highest level in nearly half a century. Particularly emerging market central banks bought the precious metal big this year, influenced by a strong dollar and international sanctions against Russia.

Gold prices have been struggling since the beginning of the year, quoting below $1,700 per ounce, definitely indicating a downward trend. On Wednesday, the Federal Reserve raised rates by 75 basis points in another move to a range of 3 to 3.25 percent. 

Gold gained ground in March. The war in Ukraine has put the precious metal back in the spotlight for investors. But even as the war seems to have been priced in, and interest rate hikes are expected to accelerate, gold remains in demand. What is going on here?

Gold is playing its traditional role in the flight to safety and rose above 2000 dollars per troy ounce this week. There was disappointment last year when the gold price reacted poorly to sharply rising inflation, but Ukraine has pushed up the price. Gold thrives best at times of  chaos, but it is not a good hedge against inflation.

Central banks and governments around the world are once again engaged in a ‘currency devaluation’ contest. The US dollar has been on a sharp downward trend in recent weeks. This has had a significant impact on financial and real assets.

The chart below, which we borrowed from Hong Kong investor Puru Saxena and goes back all the way to 1980, suggests the dollar indeed is on a long-term downtrend.

As a result of the Covid-19 crisis, inflation expectations have fallen even more. From already very low levels. When, if ever, will inflation ever rise again?

Peter De Coensel, CIO Fixed Income at Degroof Petercam Asset Management (DPAM) and fund manager Sam Vereecke tried to answer this question, which has been haunting investors for the past 40 years, in a webinar.

While everyone is watching the main US stock indices break records day after day thanks to FAMANG stocks, the gold price also keeps creeping higher towards $1800 per ounce. Many investors remain sceptical, as they struggle to value gold. But there’s a lot to say for the gold rally to continue.