Investors often opt for government bonds over gold, but Vincent Ropers explains why the yellow metal could be the better option.
Gold has been on a tear since the beginning of May, the commodity rising by about 30% over the period. This is a reflection of the market shifting towards expectations of a prolonged global growth slowdown, possibly leading to a recession.
While this move in the precious metal may be extended in the short term, I believe that there are number of good reasons why gold can continue to climb higher.
A safer haven
Gold is considered a safe harbour for investors amid gathering market storms. Often investors might opt for government bonds over gold, as they carry interest payments. However, as we see global bond yields declining in reflection of a gloomier growth backdrop, gold becomes more attractive on a relative basis.
Meanwhile, cash, arguably the ultimate safe haven, is currently providing a negligible return due to a suppressed interest rate cycle. This is also increasing the attractiveness of the yellow metal.
Gold is a classic inflation hedge. Indeed, in times of economic uncertainty, gold is considered impervious to the actions of centralised institutions. As unprecedented levels of quantitative easing have flooded global markets with hot money, asset prices have risen, but so has the potential for a sharp rise in goods and services inflation.
In this scenario, gold acts as a hedge against real value depreciation. The commodity is a powerful weapon against inflation, as policy actions cannot debase its purchasing power.
Gold is under-owned
Although central bankers have been buying gold at record levels in recent months, it remains very under-owned by private investors and institutions. If there was a further extension in the rally, it is not difficult to envisage short positions beginning to be unwound and the wider market going long on the metal.
Interest rate cuts by central banks, particularly by the US Federal Reserve, could also help gold by weakening the greenback. By making the US currency less appealing, gold becomes more attractive as it is priced in dollars.
We also had technical breakout when the price recently passed through 1,380/1,390, which created a very strong resistance for the last six years. This milestone could also support the extension of a prolonged rally. Such technical levels, particularly in commodities markets prone to speculation, can act as powerful catalysts.
As investors, we seek to unearth asset classes that we think have the potential to perform well while still offering some downside protection. Thus, instead of just tracking the gold price, which will without a doubt remain volatile, we prefer accessing undervalued gold-related assets.
Here, we have increased our allocation to the mining and resources sectors, which display attractive absolute and relative valuations at this stage in the cycle.
We now have more than 6% of our portfolio exposed to gold and gold miners, with diversified positions in the Merian Gold and Silver, and BlackRock Gold and General funds. We believe there is a strong case for holding gold as part of a liquid, mixed-asset portfolio.
Vincent Ropers is portfolio manager of the TB Wise Multi-Asset Growth fund.