Kyle Caldwell examines the forces behind the five-year peak, and the pros and cons for investors.
The gold price has hit its highest level in more than five years, a sign that investors are becoming more cautious in their outlook for equity markets.
There are various reasons why investors may be feeling more bearish than bullish, with the prolonged US/China trade war and ongoing Brexit saga both on the “worry list”.
But the big driver that has pushed gold to a five-year high of $1,383 has been the notable change in stance from the Federal Reserve, which sets the US’s interest rates. At the start of the year, the consensus was that interest rates would rise a couple of times in 2019, but owing to fears that growth in the US economy is cooling, it has now signalled that it will keep rates on hold or even cut them.
The way that markets have digested this change of tack has been a “boon for gold prices”, according to Nitesh Shah, director of research at WisdomTree, the ETF provider.
He adds: “After falling between February and May 2019, gold has recently seen a new lease of life. With the Federal Reserve reversing policy course – indicating it is likely to cut rates next year rather than hike – Treasury yields have declined and the US dollar has weakened. That has been a boon for gold prices.”
The value of the dollar typically has an inverse relationship with the gold price. When the dollar rises, gold as a dollar-denominated commodity becomes more expensive for international investors to buy, dampening demand. That is why for the vast majority of 2018 gold funds racked up sizeable losses.
According to Shah, geopolitical issues are being acknowledged by the market. He adds: “There has been little visible progress in resolving the trade dispute between the US and China in the past month and doubts still remain as to whether the presidents of both countries can unjam the stalemate when they meet at the G20 meeting in Osaka (in late June).”
Gold: the pros and cons
At times of market stress, often caused by wider economic uncertainties, it makes sense for investors to ensure that they are adequately protected, and one way to achieve this is through seeking out investments that are genuinely uncorrelated to the fortunes of equity markets.
Over the years, the precious metal has proved its value when it comes to protecting portfolios from volatile markets. Indeed, as Adrian Ash, director of research at BullionVault, points out, the gold price has risen in eight of the 10 years since 1970 that the FTSE All Share has lost value on a total returns basis, including each of the five years when the index fell by 10% or more.
Against those benefits, though, gold does not have a yield, nor does it generate cash flow or profit. Instead, its price simply reflects what the next person is prepared to pay for it, so it tends to be volatile. It is a Marmite investment – some investors love it, but others would not touch it with a bargepole.