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We Need To Talk About Gold: The Price Surge

Tom Burroughes, Group Editor , August 3, 2020

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The gold price is flirting with the $2,000 per tonne level and a number of forces have been pushing up the price in recent months. This classic safe-haven asset is in play during nervous times. And massive central bank money creation has stoked worries. What role does it play in portfolios?

Compelling
“The rationale for higher gold prices has rarely looked quite so compelling and the stars are neatly aligned for it ... whether it is US treasuries dipping below 60 bps (giving deeply negative real yields), a dollar correction, growth in MS money supply, the China/US spat, equities seemingly disconnected from the real economy, debt levels ... the list is endless,” Ross Norman, chief executive of MetalsDaily.com, said. “That silver rallied 6 per cent while gold rose 2 per cent is interesting. Times when silver leads and in a leveraged form is normally an indicator alone that the macro economy is in deeply poor shape. In the LBMA gold forecast in December 2019 we said gold would achieve an all-time high and hit a high of $2,080 - it has been quicker than we had expected.”

 

The market is being pulled in different directions, industry figures say.

“Gold’s global demand has fractured like never before as the COVID Crisis crushes household purchases while spurring record inflows from investors. This shift, away from gold for adornment and towards gold as a must-have store of value, was already underway before the pandemic, and it looks likely to accelerate, because the bleak outlook for household incomes is being met by massive government and central-bank stimulus, raising fears of inflation even as economic growth fails to revive,” Adrian Ash, director of research at BullionVault, said.  

A certain background
The World Gold Council’s Artigas said his views are helped by a background in the debt market sector. Artigas joined the organization a decade ago, having previously worked in JP Morgan’s fixed income team. That experience means that he views gold as part of a wider asset allocation and investment universe rather than some odd or exceptional area. “It [his background] has been quite helpful….when we look at gold in a portfolio we look at how it interacts with other assets.”

“We don’t give investment advice but give investors a lot of information and insights,” he said of the WGC. 

There are four important considerations about gold, he said. These are returns; diversification (touching on the key issue of correlations); liquidity; and improved portfolio performance.

“Many assets can be diversifiers but they are not very efficient about it. And we often find that in times of stress correlations [of many asset classes] go to one. Historically gold has had low correlations to the stock market in times of stress and correlations have actually gone negative,” he said. 

“We are having more conversations with institutional investors, such as pension funds in North America and Europe and Sovereign Wealth Funds about the diversification benefits of gold. Even though the stock market has recovered from the lows this year, people are concerned…some of that stock market performance is not driven by fundamentals but by very low interest rates,” he said. 

The WGC has built “Goldhub” a comprehensive website holding the organization’s data, research and insights into various aspects of the gold market. One of the key elements of Goldhub is Qaurum, an online analytic tool that helps investors understand how gold may perform under various macroeconomic scenarios.

Lombard Odier, the Swiss private bank, recently explained why the gold price has been rising.

Rising demand for gold-based exchange traded funds


 




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