The gold rally, and what it means for investors

At the start of May, Family Capital pointed out the world’s central banks have been steady buyers of gold over seven years. Follow the money was the message.

Even after a subsequent 10.5% gain in bullion price to $1,426 an ounce, there is a decent chance it will rise further before it falls. Possibly, much higher, if a global crisis sparks a buying panic. 

An opinion poll conducted by YouGov and the World Gold Council, the UK industry trade body, has confirmed that 54% of central banks expect their overall gold reserves to keep rising over the next twelve months. 

Not a single central bank expects a fall. And 11% of emerging market and developing economy respondents have confirmed plans to push reserves higher. Russia, Turkey, China and Kazakhstan have led the buying this year. 

The rise in the bullion price reflects a lack of faith in the US dollar, following signals from the US Federal Reserve that it intends to cut rates in the near term. Central banks are not always free of political influence, and distaste for Trump’s policies may figure in the mix.

Investors also believe US President Trump wants to keep the dollar down to boost his export drive. They are also concerned that high levels of US debt, following tax cuts and increased expenditure, will weigh heavily on the economy. 

A dash for safety by investors means sovereign bonds totalling $12 trillion now stand on a negative yield.  In effect, investors are prepared to pay money to governments to look after their money. Which makes the zero yield from gold more attractive than normal.

Few are more concerned by the situation than Ray Dalio, founder of US manager Bridgewater. He has been expressing concern over US debt, social security and pension obligations for a long while.

In a recent research note, Dalio ratcheted up the gloom, arguing that the world had used leverage to go long on assets unlikely to offer sufficient return. He fears depreciation in the value of money, as well as global conflict.

He concludes: “It would be both risk-reducing and return enhancing to consider adding gold to one’s portfolio,” adding that most investors are underweight the yellow metal.

Goldman Sachs, Morgan Stanley and Citigroup have been raising their forecasts for the gold price in anticipation of higher demand.

If the price rally persists, retail investors who have largely been on the sidelines could join the party, according to Richard Hayes, chief executive of the Perth Mint.

“It takes a little while for a rally like this to really feed into mainstream society,” he told Bloomberg: “If it is sustainable it will undoubtedly spark additional interest not only from institutions but from the average investor in the street.”

Assets owned by gold Exchange-Traded Products, often used by retail investors to invest in gold have been hitting a record in Europe.

Data for the half-year to June produced by data provider ETFGI revealed a global rise in ETP demand, with State Street’s gold ETP leading to rise in assets of $2.24 billion in June, against a net $423 million for the half-year. 

Gold has been hitting a new high in India, in local currency terms, as investors became more worried about global conflict. 

Uncertainty has even contributed to some revival in the price of cryptocurrencies, seen as an alternative to the dollar, despite their volatility and talk of a ban on their trading by the Chinese and Indian authorities.