News & Views

What is the future of Gold?14 April 2020

As we continue to see the effects that the pandemic is having on our daily lives, world economies and global stock markets; one asset class that does seem to be weathering the storm is Gold. As has been the case with most ‘safe haven’ assets, Gold hasn’t been a ballast in portfolios for the entirety of this recent market shake out. In the past month, from peak to trough, Gold dropped in the region of 12%. This was attributed to the dash for cash which hit all asset classes. An increase in the demand for cash from margin calls having to be covered, as one example, led to positive correlation, albeit temporary, across all of the asset classes.

However, the positive correlation of Gold to Equities soon reversed and it is now negative. The Fed’s huge injection of liquidity on the 23rd March contributed to the gold price rising in line with other “safe haven” assets and year to date gold is up nearly 18%. This was a similar pattern for Gold as seen during the financial crisis. Typically, gold tends to recover within the weeks after a sharp decline, and usually goes to new highs. If further fire sales are avoided, safe-haven demand should boost the gold price.

Gold is highly sensitive to interest rates, and lower rates reduce the opportunity cost of holding non-yielding bonds. As gold doesn’t provide a coupon or dividend, the compound annual growth rate for gold since 1971 (when the free market in the metal was created) has been about 7.75% a year.

From a long-term perspective, gold will still remain an important diversifier within portfolios, as the environment of low interest rates and virus-induced global slowdown would support a prolonged rally. This is reflected in the fact that the amount currently invested in physical gold exchange-traded products listed in Europe, as well as globally, is at a record high. For instance, SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, is at its highest AUM in more than three years. On the physical side, three of the world’s biggest gold refineries have partially reopened after several weeks of closure, which temporarily disrupted global supply.

The points we touched on in the article we wrote on gold in August last year, which can be found on our website (https://maia-am.co.uk/news-views/the-bright-outlook-for-gold), are now more highlighted than ever. The fiscal and monetary stimulus programmes that have been enacted worldwide are a favourable environment for gold. Lower and zero interest rates will be the main driver on price appreciation. Gold has properties that investors favour in times of market stress. The arguments of real rates declining and risk increasing as an environment to add Gold to the MAIA portfolios at the back end of last summer, are now, more than ever, applicable.


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