AJ Bell press comment – 24 January 2023
- Gold climbs to £1,576, just shy of £1,580 record high in sterling
- In dollar terms, gold is climbing back towards $2,000, and has risen around 15% since the end of September
- A golden cross has just appeared in technical trading charts
- How safe is gold? And should investors buy some?
Laith Khalaf, head of investment analysis at AJ Bell, comments:
“Gold is closing in on a record sterling high, rising to £1,576 an ounce, just shy of its peak level of £1,580, reached in March of 2022. Gold has been rising sharply in dollar terms in the last few months too, but still sits 6% lower than its peak level of August 2020.
“A weakening dollar, the reopening of China, and a slowing global economy have all helped propel the precious metal upwards in recent months. It’s likely that gold has received a bit of a nudge from short term traders too, as a ‘golden cross’ has appeared on the technical charts. This happens when a short-term moving average of prices, usually 50 days, rises above a long-term moving average, usually 200 days (see chart below). Gold has just experienced one of these graphical epiphanies, and a golden cross is often used by technical traders as a buying signal.
“If you’re thinking to yourself that the intersection of two lines on a chart isn’t an entirely compelling reason to buy into an asset in the real world, then you have an excellent point. There are some more fundamental factors at play which are also giving gold bugs cause for optimism, but rising interest rates on cash and bonds present a pretty significant fly in the ointment.”
(All gold price and performance data from Refinitiv.)
Gold is climbing
“Gold is currently trading at $1,940, up from $1,660 since the end of September 2022. One reason is the effect of a weakening dollar. Gold and the dollar are inversely correlated with each other, not least because the precious metal is priced and traded in the US currency. The dollar has fallen against a trade-weighted basket of currencies by around 10% since its peak in September, and that helps to explain why gold has risen by around 15% in dollar terms over the same period.”
Source: Refinitiv
Gold near record sterling high
“While the gold price has risen sharply in recent months, it still sits below the record price of $2,063 reached in August 2020, which was closely contested by the $2,052 reached in March of 2022 (intraday highs may differ slightly). However, thanks to sterling weakening considerably over the last year, gold is now closing in on a sterling high.”
Source: Refinitiv
Currency conundrums
“There is some expectation that the dollar will continue to weaken from its recent peak, with many anticipating that the Federal Reserve will continue to slow its tightening of monetary policy throughout 2023, and taking this as a bullish signal for gold. Notwithstanding the extremely unpredictable nature of currencies, UK investors need to be a bit wary here because if the dollar is falling against a broad basket of global currencies, that’s likely to include the pound.
“Since the end of September, the price of gold has risen by around 15% in dollar terms, but by just 3% in sterling terms, as the US currency has weakened against the pound over this period. So UK investors have not enjoyed the full force of the recent rally because of adverse currency movements. A further fall in the greenback may boost the dollar price of gold, but this may not feed its way cleanly into gains for UK investors in pounds and pence.
“It’s also interesting to note that figures from the World Gold Council show that the 12 month return for gold after a dollar peak has been 16% on average. There has been a wide range of outcomes, from the gold price rising over 30% in the 12 months from the dollar peak in 2005, to falling by almost 15% in 1969. Nonetheless, the 15% rally in the price of gold since September is pretty much bang on the average 12 month return after a dollar peak, which suggests the immediate upside might be limited from here.”
The wider gold outlook
“As well as the potential for a weaker dollar, there are other fundamental factors favouring gold for bulls to hang their hat on. China is a key market for gold, and while the lifting of COVID restrictions is likely to be a bumpy ride, in the long term it should lift consumer demand. In the short term, inflationary pressures and higher interest rates are forecast to produce a global economic slowdown, and that may also be an opportunity for gold to shine. However, you’d have to be living down a pretty deep mine shaft to have avoided hearing about recessionary conditions, so you’d expect a weakening global economy to be already factored into the gold price to some extent.
“This is also a bit of an unusual slowdown, because central banks are hiking interest rates despite weakening economic growth. This is negative for gold because it pays no interest and so looks less attractive compared to other safe havens like bonds and cash when yields rise. If the global slowdown proves worse than expected in 2023 and central banks have to slow or even reverse interest rate hikes, that could be positive for gold. So gold can act as a bit of insurance against calamity, which is probably no bad thing in a world of heightened geopolitical tensions and widespread COVID infections. But now yields on cash and bonds are that much higher, conservative investors may be tempted away from gold back to their natural habitats.”
How safe is gold?
“Gold is often seen as a safe haven, but investors also need to be careful not to equate this with price stability. People do tend to flock to the precious metal in terms of financial stress, but it shouldn’t be taken as read that gold isn’t volatile. It is, and steep losses can be incurred. Between 1980 and 1982, the gold price fell by over 60%, and between 2011 and 2015, it fell by around 45%.
“While gold traders often think in just days or weeks, everyday investors usually want an asset they can hold for years, and the long term case for gold is more nuanced. We can have a fair degree of confidence that an investment in the stock market will provide a decent return if held for ten years or more. Shares in companies produce cashflows generated from economic activity, which rises over time. Gold produces no cashflows and has few industrial uses, with demand mostly coming from jewellery manufacture and investment, so it’s more difficult to pin an intrinsic value on the precious metal. Consequently, the long term direction of gold is pretty difficult to gauge because with no cash flows to speak of, sentiment will play a larger part in pricing. From its peak in 1980, the gold price fell by 33% over the next 20 years, and it took 27 years for gold to reach its former high, as the chart below shows. That’s a long period in the wilderness.
Source: Refinitiv
“The stock market has of course also experienced some lengthy spells of weak performance, if you similarly look at the extremes. From the height of the dot com bubble in 1999 to the depths of the pandemic in 2020, the FTSE 100 fell by almost 30%. But over this period, an investor would have still experienced a 50% return on their money, with dividends rolled up. There’s no such luck for long term gold investors who receive no cash payments along the way.”
Should investors buy gold?
“So why does anyone buy gold at all? It’s true that many investors will never hold gold and be perfectly capable of achieving their financial goals. But the value of the precious metal lies in its ability to act as a bit of diversification in a portfolio because it behaves differently to other assets, especially equities. If you’re a conservative investor, you might therefore hold bonds and gold alongside equities because they will tend to perform well at different times. But it isn’t the shortcut to riches those who are trading the ‘golden cross’ might believe and as the historical returns clearly show, gold does come with significant risks attached, especially when it is already trading near record highs. We also now live in a world where cash and bonds are offering much higher yields to investors and that does take some of the limelight away from gold, particularly for global multi-asset funds.
“Those who wish to hold gold should therefore do it with a relatively small portion of their portfolio, as a bit of diversification alongside more mainstream assets. Thanks to the arrival of ETCs (Exchange Traded Commodities), gold is now easily tradeable at the push of a button and these funds can be held within SIPPs and ISAs to protect profits from capital gains tax. Most investors should stick to physically backed ETCs such as iShares Physical Gold ETC. There are some funds which invest in gold futures rather than physical gold itself and indeed some which provide leverage to the gold price, amplifying its movements both positively and negatively. Such instruments are complex, risky and can have costs involved which are difficult to understand, so the vast majority of investors are best off sticking with plain vanilla gold ETCs, which simply buy and sell the precious metal itself.”
