Amid an uncertain global economic landscape, and an increase in geopolitical tensions, the price of gold has not only proven resilient over recent times but has also seen a significant rally, reaching an all-time high of $2,350/oz earlier in the month. Gold has reacted in a surprisingly nuanced manner to current market conditions and the surge in gold prices comes at a time when inflation remains stubbornly high and the prospect of lower interest rates seems more uncertain than ever.
So, what are the diverse factors currently driving gold’s prominence as a strategic asset and why are many investors now viewing gold not just as a safe haven, but as an important stabiliser of a well-diversified investment portfolio in stormy economic waters?
Current Market Conditions
Despite Central Banks efforts, inflation has remained sticky and the path to lower interest rates looks more uncertain than it has in some time. The Dollar has also proven far more resilient than many thought and despite the long road ahead there is an increasing case for ‘no-landing’.
Both a strong Dollar and high interest rates have historically been headwinds for gold but the conditions around the recent rally have been far more nuanced than ever before. In fact, the mere anticipation of rate cuts has been enough of a support for gold to reach the all-time high of $2,350/oz in April; this is around the value that many gold-optimists now believe could be the new ‘normal’ and a value that it could trend at for some time.
Geopolitical Risks
Navigating geopolitical risk and tensions has become an almost everyday consideration for many areas of the world and financial markets.
We are over two years into the Ukrainian invasion and over six months into the latest Middle Eastern conflict, neither of which show any sign of being resolved in the immediate future. During this time, many have used gold as a hedge of value against geopolitical risk and unlike oil, does not have the supply and demand concerns around war and disruption of supply.
Central Bank & Retail Demand
Central Bank purchasing reached the dizzying heights of 1000 tonnes for the second successive year in 2023 and it is looking like Central Bank buying is set to continue as many developing nations look to secure their reserves. China led the way in 2023 with 225 tonnes, followed by Poland with 130 tonnes and it is believed that around a quarter of the world’s Central Banks will continue to bolster their reserves in 2024.
In an uncertain monetary and geopolitical environment, many Central Banks believe that gold is an effective store of value, a point perhaps evidenced by the fact that a 10kg block of gold was enough to buy an average US home in 1929 and remains enough to buy an average US home today.
Secondary, but just as critical in the context of supply and demand is the increased physical demand for bars, coin and jewellery from Asia. By comparison, the demand in the West has been in direct correlation with the squeeze on real wages as inflation and interest rates have taken hold, however, this has been offset by strong confidence from many Asian consumers. Most notably in China, many have sought value preservation in gold following easing of COVID restrictions.
The uncertainty of when, or if, these drivers may change is unlikely be resolved any time in the immediate future, but it is impossible to ignore the 18% surge in gold prices in just two months. Forecasting where they go from here though is anyone’s guess, but many believe the previous record of $2,075/oz could be the floor.
IBOSS View & Positioning
As multi-asset managers, and like many of the world’s Central Banks and Far-Eastern retail investors, IBOSS view gold as a long-term diversifier against more traditional risk assets. The in-unison fall of bonds and equities in 2022 exemplified the need for diversifying assets in order to reduce volatility and ultimately protect capital.
In the more inflationary environment we currently exist in, other alternative assets such as property have been facing significant headwinds as yields and interest rates rise. Whilst gold has historically struggled in these conditions it has, so far, fared well in the face of broader market uncertainty. Highlighting the need for diversification even amongst alternative assets.
We gain our exposure to gold through Ninety-One Global Gold. We have held the position since August 2019 and it is predominantly exposed to gold miners. George Cheveley has a long track record of actively positioning the fund in various market conditions and cycles. Typically, miners outperform in a rising gold market and have done so in the most recent rally. As inflationary pressures show signs of abating this could be even more positive for miners as they begin to show an increase in production, growth and profit margin. It is worth noting that due to its relative volatility even a small position in gold miners can act as effective diversifier.
From geopolitical risks and central bank purchasing behaviors to the contrasting demand dynamics in the East and the West, the role of gold as a hedge and a diversifier in today’s volatile markets becomes increasingly compelling. Gold’s enduring value and strategic importance underscore its potential not only as a safeguard but as a key player in achieving a balanced and resilient investment portfolio.
This communication is designed for informational purposes only and is not intended as investment advice. These investments are not suitable for everyone, and you should obtain expert advice from a professional financial adviser. Please note that the content is based on the author’s opinion at the time of writing/publish date. Our views and opinions regarding certain investment themes and topics can alter over time as the macroeconomic background changes and other industry news is made publicly available, this is not intended as investment advice.
Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise, and investors may get back less than they invested.
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IBOSS Asset Management Limited is owned by Kingswood Holdings Limited, an AIM Listed company incorporated in Guernsey (registered number: 42316).
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