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  1. Wealth
November 16, 2022

Gold rush – is the yellow metal set to soar?

By Will Wainewright

It’s nicely poised after being overshadowed by US Treasuries this year, but is now a good time to invest in gold? Will Wainewright, founder of Alternative Fund Insight, investigates

Long considered a safe haven asset, the price of gold has fallen this year despite declines in stock and bond markets and widespread volatility.

It has faced competition as a crisis-time asset from US government bonds, still regarded as the ultimate “safe” asset — and one which, unlike gold, offers an income.

‘Ten-year Treasury yields have risen from 1.6 per cent a year ago to 3.9 per cent currently, so in this environment of rising rates there has been an opportunity cost to holding a non-yielding asset like gold,’ says Jason Hollands, managing director at Evelyn Partners, a UK wealth manager.

‘Gold is often perceived as a safe haven but can be quite a volatile asset, especially since it has become easier to trade as a financial instrument following the emergence of exchange-traded commodities products.’

gold bars
Gold can be a volatile asset

Interest rates have also been going up this year, which has increased competition from cash holdings too, adds Rob Morgan, chief market analyst at UK wealth manager Charles Stanley.

‘It is priced in US dollars, so will have served clients well in just about all countries except the US this year.’

Should I invest in gold or crypto?

Hollands says the yellow metal offers diversification. Evelyn holds gold in portfolios as a de facto insurance policy in case of a collapse in confidence in the financial system.

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While few in the market are yet expecting a repeat of the 2008 banking crisis — many say the climate is more comparable to the dot-com boom and bust — more incidents like the collapse of crypto exchange FTX last week could heighten gold’s appeal.

‘Some of the asset classes (notably crypto) which have been subject to speculative flows have been seeing stress, and if that feeds into other parts of the financial system, especially banking, that could provide more support for the gold price,’ says Hollands.

FTX Arena in Miami
Miami’s FTX Arena will be renamed after the world’s third-largest cryptocurrency filed for bankruptcy. Image: Shutterstock

More pertinent to the gold price in the short term will be the direction of US interest rate policy.

Further rate rises are expected, but market consensus has turned more dovish after recent central bank proclamations and the pace of hiking is expected to slow.

‘It might be a good time to start buying’

‘Market expectations of rates seem to be peaking so it might be a good time to start buying gold now if you don’t hold any,’ says Morgan.

‘Our clients will probably hold anywhere between zero and 5 per cent gold in their portfolios.’

Longview Economics, which issues research to macro hedge funds, sees ‘significant fuel coming for a gold price rally’ in its modelling.

Gold is technically oversold, a crowded short trade and ‘likely to be supported by weaker US rates/bond yields [and a weaker US dollar] in coming weeks/months,’ it recently told clients.

Furthermore, the London-based firm is predicting a US recession next year. ‘Typically, the gold price rallies into recessions. That has been the case in six out of all seven US recessions since the end of Bretton Woods.’ 

Another factor putting upward pressure on the price is rising demand from central banks, driven in large part by a flight to safer assets as high inflation persists.

Hollands is seeing significant structural demand for gold from central banks as they shore up their assets, with demand up 28 per cent year-on-year according to the World Gold Council.

Jason Hollands and Rob Morgan
Evelyn Partners MD Jason Hollands and Rob Morgan, chief market analyst at Charles Stanley

Turkey, Uzbekistan and India were the largest buyers in the third quarter.

But for all the positive indicators, Morgan of Charles Stanley does not recommend a higher than 5 per cent holding.

‘Any more than a 5 per cent holding and you are in the laps of the gods,’ he says, describing the metal as the unreliable partner of assets.

‘Over the long term it does maintain spending power but it is very noisy and choppy in the short term.’

Other precious metals can be even worse.

‘Take silver and platinum; more volatile and with the added factor — or complication — of having an industrial use, which makes its price even harder to fathom.’

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