De­spite gold’s re­cent run, don’t fall for its al­lure – it is a shin­ing ex­am­ple of what not to buy

Mar­ket en­thu­si­asm over the pre­cious metal could set up in­vestors for a fall, writes Taha Lokhand­wala

The Daily Telegraph - Business - - Business -

Gold has smashed through a new price record this week, sur­pass­ing the psy­cho­log­i­cally im­por­tant bar­rier of $2,000 an ounce. In­vestors are do­ing well out of a su­perb run that has made the metal the best per­form­ing as­set this year.

It is a per­fectly le­git­i­mate as­set that ev­ery in­vestor should in­clude in their port­fo­lio – but there are right and wrong rea­sons to buy it and the mar­ket’s en­thu­si­asm could be set­ting up in­vestors for a fall.

Let’s start with the rea­sons be­hind gold’s ris­ing price. It has in­creased more than 30pc this year and kicked off its spike in earnest in mid-March, as the pan­demic be­gan en­gulf­ing the West.

This made sense. Fear had taken over in­vestors and share prices be­gan quickly los­ing value and the gold price rose. Its use as a safe haven and store of value was ev­i­dent.

But as mar­kets bot­tomed out, the gold price con­tin­ued to soar. Since April, the price has risen 30pc, just be­low the 34pc rise in the S&P 500.

Gold, seem­ingly, was be­com­ing less of a “fear” as­set.

At that point the price was ris­ing for dif­fer­ent rea­sons. In tack­ling the eco­nomic con­se­quences of coro­n­avirus, cen­tral banks and gov­ern­ments un­leashed a wave of fi­nan­cial sup­port.

This in­flux of cash – known as quan­ti­ta­tive eas­ing – to­talled

$20 tril­lion (£15 tril­lion) and is now worth nearly one fifth of the world’s econ­omy, ac­cord­ing to Bank of Amer­ica Mer­rill Lynch. This was used to buy gov­ern­ment and low-risk cor­po­rate bonds and fuel fi­nan­cial mar­kets.

Such bonds are tra­di­tion­ally the pre­serve of con­ser­va­tive in­vestors but quan­ti­ta­tive eas­ing had pushed down yields. Some $16 tril­lion of global debt now has a neg­a­tive yield mean­ing new in­vestors want­ing an al­ter­na­tive to stocks opted for gold.

The in­flux of cash can lead to in­fla­tion, and mar­kets be­gan pric­ing in the ex­pec­ta­tion for higher in­fla­tion in the long term. This fur­ther un­der­mined the ap­peal of bonds and the “real rate” (yield mi­nus in­fla­tion) be­came neg­a­tive for a lot of debt.

Then came the most re­cent boost, the de­val­u­a­tion of the US dol­lar. Gold is priced in dol­lars, but it is not a dol­lar as­set. It is a pseudo cur­rency with no in­trin­sic value and can only be worth what it is priced in other cur­ren­cies.

For ex­am­ple, the US dol­lar has lost 14pc against the pound since April. As the dol­lar loses value the gold price in­creases as its worth stays the same – just as one pound is worth more dol­lars now than it was in April. Ben Sea­gerS­cott, of wealth man­ager Til­ney, cal­cu­lates that dol­lar de­pre­ci­a­tion has ac­counted for about one third of the gold price rise – 10 per­cent­age points.

All this brings me back to my con­cern with gold. Nowhere in the anal­y­sis of why the price is ris­ing did the rea­son “be­cause it is a good in­vest­ment” ever come up.

Gold has no in­trin­sic worth. It is not a busi­ness where prof­its can drive share prices higher. Gold is not an in­vest­ment where in­vestors can ex­pect in­come and com­pounded re­turn. Yet DIY in­vestors have been scram­bling to add gold to their port­fo­lios. Fig­ures from In­ter­ac­tive In­vestor, a bro­ker, showed iShares Phys­i­cal Gold and Wis­domTree Phys­i­cal Gold were two of its best­selling funds this month.

Gold has a place in a port­fo­lio, a 5pc-10pc al­lo­ca­tion to act as a buf­fer and a di­ver­si­fier for when stock mar­kets take a tum­ble.

But un­less you’re will­ing to make short-term trades, and take on all the risk and dif­fi­culty that a buy­ing low and sell­ing high strat­egy brings, then pil­ing into gold now is a mis­take.

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