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We Need To Talk About Gold: The Price Surge

Tom Burroughes, Group Editor , August 3, 2020

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The gold price is flirting with the $2,000 per tonne level and a number of forces have been pushing up the price in recent months. This classic safe-haven asset is in play during nervous times. And massive central bank money creation has stoked worries. What role does it play in portfolios?

Gold prices are on fire at the moment, flirting with $2,000 per ounce in physical bullion as nervous investors become concerned about a second spike in coronavirus. And data shows that for many investors, there’s plenty of room for gold in their portfolios, industry figures say. 

The gold price has risen by 17 per cent in dollar terms over the first half of this year.

As reported by BullionVault, a specialist firm, spot prices for physical bullion delivered in London eased slightly late last week after US Federal Reserve chairman Jerome Powell said he would do what was necessary to prevent the US economy from a slump. But the gold rally may continue. In the words of the World Gold Council’s Louise Street, the pandemic created “the perfect storm” for gold investment. Global interest rate cuts and central bank cheap money have cut the cost of carrying gold. 

And Street’s colleague at the industry group, Juan Carlos Artigas, told this publication that there have been big inflows into the yellow metal so far this year. “Year to date there has been close to $50 billion of inflow into the gold market via physically backed ETFs. This is a global phenomenon,” he said. 

But this is a complex market, with consumer as well as investment forces in play. In its second-quarter report on the market, issued a few days ago, the World Gold Council said Q2 gold demand actually fell by 11 per cent year-on-year to 1,015.7 tonnes. While some elements of public policy have lifted the price in the market, COVID-19 has interfered with consumer demand for gold (such as jewelry). On the other side, there were “record flows” of 734t into gold-backed ETFs [exchange traded funds]. 

The WGC’s Artigas said getting a clear handle on gold requires people to understand that it has a dual nature. It is an investment asset and a medium of exchange (money) ; it is also a consumption item (jewelry, industrial uses). This dual nature is important because gold can be used both to hedge certain market risks and moves, and can also be an asset that is driven by the economic and market cycle.

Gold’s role as a portfolio diversifier, because of its low/negative correlations to other asset classes, is certainly getting plenty of attention in the current fraught environment. And there’s plenty of room for gold in the portfolios of high net worth individuals, Artigas said. 

“Across all portfolios around the world, gold is only 1 per cent of the total. However, this is not evenly spread out. There will be some investors – we estimate that approximately 20 per cent in total – who hold between 3 and 5 per cent of assets in gold and only a small percentage hold more than 5 per cent. The vast majority has very little or no exposure to gold. Gold is accessible to all investors,” he said. 
 

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