Recent Trend

From a low point in late 2018, the gold price has gone up by almost 50%. And the upward trend appears to be intact – so far this year the price is up ~20%. Only 10% is missing to the all-time high.

Enough is enough?

Spot Gold Price USD/ounce

What is behind it

Gold is seen an investment for times of crisis –  something that keeps its value even if everything else doesn’t. As in any market, the price is determined by supply and demand. Supply is relatively stable (from mining and recycling), usually the majority goes into jewellery and industrial use. But contrary to many other raw materials, investment demand (including Central Banks) also plays a central role, and in some years represents more than half of the total volume.

Why do investors buy gold? The most quoted reason is protection against inflation. Now you could argue that stocks provide inflation protection, too. And so does property. And actually, so does fixed income as long as the nominal interest is compensating for the inflation – in other words, real interest rates are more relevant than inflation itself. But here is the thing – real interest rates are negative already. And equity and property prices tend to get depressed in times of crisis. So if you are concerned about inflation as well as economic growth, gold appears a good alternative.

What has historically limited investors’ interest is the fact that gold carries no ongoing return. If you buy a bond instead of gold, you get a yield. Except today you don’t. If you buy a solid € bond today, you have to pay the debtor to accept the money. And at a sudden the zero return makes gold look attractive.


What to expect – and what to do

Globally, investors are not overinvested in gold so far. Inflation fears may come back. Covid-19 has led to increased concerns around government budgets and the stability of the financial system. And big budget deficits seem to be correlated with stronger gold prices (see the graph).

Federal Deficit as % of GDP vs. Spot Gold Price

Each year the mining industry digs out ~ 3,500 tons of gold – roughly 174bln $ at current prices, corresponding to 0.2% of global equity market capitalisation. In other words: If stockholders across the world were to buy an additional gold position representing 1% of their portfolio values, that would eat up the entire global gold production for the next 5 years. We are not saying that is going to happen. But it illustrates the potential impact of gold investments on the market. And whilst production can be increased (be it at higher marginal costs), that won’t happen overnight: It typically takes about 20 years to go from discovery to full scale gold mine.

Will investors buy more gold? That remains speculation. But if they do, it can have a material effect on the gold price. A few weeks ago, Bank of America announced a gold price target of US$3,000/oz. Is that the most likely outcome? Maybe not. But it shows what could happen.

Typically, we would always keep a small portion of our portfolios in gold. Our current strategy has given that position more weight; and at this moment, we do not plan to reduce it.


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