Investors should heed headwinds as caution sends gold surging into record territory
The gold price reached a record high of $1,944 (£1,511) per ounce yesterday as investor caution continues to push the metal’s value higher. Despite being in uncharted territory, analysts expect it to keep on going well past the $2,000 mark.
A survey of more than 1,300 DIY investors, conducted by online gold marketplace BullionVault, showed they expected the price to rise by 30pc by the end of 2020. This would take the price well past $2,500.
The previous record of $1,920 per ounce was set in September 2011 but this took a steady five-year upward trajectory boosted by the response of central banks to the 2008 financial crisis.
The latest peak has occurred in less than half that time as central banks return to low interest rate policies and bond-buying programmes.
Gold had been losing appeal, with stock markets the preferred space for most investors. For a while the American central bank was raising interest rates, muddying the outlook for gold. However, it began reverting to its old dovish ways – initially to stave off an economic slowdown and later to counteract the devastating impact of coronavirus.
The main factors that drive investors to gold are interest rates and safety – both have boosted demand in recent months. Near-zero interest rates are a positive for the gold price.
When the yields from cash or low-risk government bonds are high, the appeal for gold, which yields nothing, diminishes.
The reverse is also true, and low or negative yields push safety-seeking investors towards the metal, pushing up its value.
The outlook for gold is also linked to the strength of the US dollar. A weaker dollar tends to boost bullion as it is seen as a store of value and the country’s bond buying programme is expected to weaken the currency.
Ben Seager-Scott of Tilney, a fund shop, said: “Gold acts almost like a pseudo-currency, except no central bank can print unlimited amounts of it and devalue it.”
Data from the Commodities Futures Trading Commission, the American regulator, showed optimism for gold among professional investors such as hedge funds, traders and banks peaked earlier this year and had reduced as the price has risen. However, there were still more buyers than sellers.
Andrew Duncan, of Killik & Co, a broker, added that the actions of governments and central banks would lead to inflation in years to come, and investors were “buying gold as a hedge against inflation in the longer term”.
Ian Jensen-Humphreys of Quilter Investors, a wealth firm, said he had recently bought bullion for his clients via an exchange-traded product, a fund listed on the stock market that uses derivatives to track the price of gold.
Shares in gold miners have also been rising and could provide an alternative way to invest in the metal. Mr Duncan said that shares of gold miners such as American firm Newmont Corporation have risen strongly.
Those unsure of selecting their own stocks could also look to specialist active funds, such as Ruffer Gold or BlackRock Gold & General.
Despite the optimism surrounding the precious metal, investors should be wary of headwinds facing the metal. Countries such as China, Russia and Turkey have been buying gold wanting to avoid holding reserves in the US dollar, as geopolitical tensions between the states and America rise. However, as countries divert more of their capital towards the pandemic, reserves may be sold off causing prices to fall.
Gold jewellery demand may also decline as household earnings have been reduced due to coronavirus. However, fluctuating demand tends to have less of an impact on the market.
The gold price hit a record high yesterday but experts believe it will continue to rise