Perspective

Investors ask: what will happen to the price of gold?


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Investors ask: What's your view on what will happen to the price of gold over the next 12 months?

For the first time in close to a decade – and for only the second time since the early 1980s – gold has registered six consecutive quarters of positive returns. Gold returned 11.2% (in dollar terms, to end of April) and has made new highs in every currency except for the US dollar.

Despite these strong returns, there remain a number of structural and technical supports for the gold price which we believe suggest further potential gains in the second half of the year.

"Safe haven" characteristics to the fore as COVID anxiety persists

Gold has, on average, delivered positive returns during previous equity market drawdowns. It is regarded by investors as a "safe-haven" asset in times of uncertainty, with a physical value and no counterparty or default risk.

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Equity markets have recovered from their March lows. However, in the absence of a vaccine, there remains the risk of a second wave of infections, leading to additional economic disruption and further stock market falls. In this environment, we think demand for gold will remain high.

Long-term inflation fears add to gold's appeal

In the past, gold has proven to be a good inflation hedge, with the price rising significantly when the rate of inflation has increased by 2% or more.

In the near term, we do not see significant inflationary pressure. However, given the scale of monetary and fiscal stimulus and disruption of supply chains, an inflation overshoot remains a notable risk. The gold price should perform relatively well in this environment.

Demand is strong

It is unsurprising that in the short term we have seen significant demand for gold. According to the World Gold Council, gold-backed exchange-traded funds (ETFs) added 298 tonnes, or net inflows of $23 billion in the first quarter of 2020. This was the highest quarterly amount ever in US dollar terms – and the largest tonnage addition since 2016.

Investors ask: do you favour physical gold over shares in gold miners, or is there a case for owning both?

The outlook for gold equities is arguably stronger today than at any point in the last 20 years. Gold producers are generating margins roughly 200% higher than at the peak of the last bull market in 2011, but valuations are reflecting gold prices that are significantly below current prices.

The macro environment that is driving current gold price strength is particularly favourable to gold producer profitability. Revenue is going up, while costs are firmly anchored.

We are however mindful that gold equities have tended to exhibit higher correlation to broader equity markets and therefore do not offer quite the same defensive benefits during equity market corrections. In the construct of a multi-asset portfolio, our preference remains to hold physical gold within our alternatives allocation.

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Marc Brodard

Marc Brodard

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