- Gold hit $3,000 an ounce for the first time ever on Friday and continues to flirt around that mark
- Central bank purchases of gold, sticky inflation, concerns over government debt and substantial shipments into the US ahead of Trump’s tariffs are all driving the gold price higher
- The precious metal has massively outperformed the S&P 500 this century
“Gold is flirting with the $3,000 an ounce mark, having hit that milestone for the first time ever on Friday, and the precious metal continues to perform strongly, even if gold mining equities are failing to catch the eye of investors around the world,” says AJ Bell investment director Russ Mould.
“Central bank purchases of gold, plus substantial shipments into the US ahead of President Trump’s imposition of tariffs, are helping to drive the metal’s price higher, as are sticky inflation and ongoing concerns over lofty government debts on both sides of the Atlantic.
“This is looking like the third major bull run in gold since Richard M. Nixon withdrew America from the gold standard on 15 August 1971 and, in the process, pulled the rug from under the Bretton Woods monetary system that had prevailed since the end of the Second World War.
Source: LSEG Refinitiv data
“The first surge took place in the 1970s, after Nixon’s policy switch that was designed to free up room for US government spending, particularly in Vietnam. Two oil price shocks, in 1973 and 1979, stoked inflation and investors took fright from paper assets and promises, such as government debt, and sought out ‘real’ assets where supply only grew slowly instead.
“The second took place in the early 2000s, as central banks played increasingly fast and easy with monetary policy in response to a series of crises, real or perceived. They ranged from the collapse of the LTCM hedge fund in 1998, the millennium IT bug, the collapse of the technology, media and telecoms bubble and then the Great Financial Crisis and the European Debt Crisis. Record-low interest rates and Quantitative Easing followed, to persuade some investors that central banks and policymakers had lost control, just as it seemed they had in the 1970s.
“The third, and current surge, has its origins in the last decade, as central banks continued to run zero-interest rate policies and did little to sterilise QE. Then came the Covid pandemic, and a crisis for which already-tattered government balance sheets were, in many cases, ill-prepared. Government borrowing surged, especially in the UK and USA, and in the latter the federal debt has continued to grow at an unprecedented pace. The result is that the annual interest bill is now $1.2 trillion, or more than a fifth of the federal tax take, a situation that seems unsustainable. The Trump administration is trying to tackle this head on, with tariffs and efforts to boost America’s manufacturing base, but perhaps gold bugs are sensing another shift in global monetary policy and how the system is managed, especially as inflation remains stubbornly above central banks’ 2% target.
“Whatever the reasons, each of these bull markets has been explosive.
Source: LSEG Refinitiv data
“Gold bugs will therefore argue that there could still be more to come, given how the advance in this third bull phase still pales compared to the previous two. They will also note how the metal has beaten the S&P 500 hands down this century, despite investors’ enthusiasm for equities, which leaves not just the S&P 500 but the Dow Jones Industrials and NASDAQ trading near to all-time highs after strong, post-Covid gains.
Source: LSEG Refinitiv data
“Sceptics will point out the prior two runs both lasted for about a decade and how this one is almost 10 years old, too, if you take the December 2015 low as the starting point. They may also take Warren Buffett’s line on the metal and assert its value can be no more than the cost of production, given its almost inert chemical nature, limited industrial use and inability to generate any cash or yield.
“As the Sage of Omaha succinctly put it in a speech that he gave at Harvard in 1998, ‘Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.’
“As such, gold is not likely to be suitable for all investors. Some will assert that cryptocurrencies are a modern-day digital haven that merit closer attention, while others may feel they have simply missed the boat.
“Those investors who do feel that gold may at least offer some useful diversification in a balanced portfolio still have to address the question of how best to approach the asset.
“It is possible to buy physical bars or coins, although there are frictional costs here that include insurance, storage and security, so this approach may not appeal to everyone, especially if they are looking to shield any capital gains by using a government-approved, tax-efficient wrapper such as an ISA or SIPP.
“Should they feel that gold fits with their overall investment strategy, time horizon, target returns and appetite for risk, investors can glean exposure to the metal in a variety of different ways.
“They can do so directly, or through individual mining stocks or baskets of them, via actively or passively managed funds. Each approach comes with a different risk-reward profile that investors should consider if they decide to put some money behind the precious metal.”
