Gold is the cynic’s investment, a haven from the vagaries of the wider world, and this year cynicism is proving to be popular. Amid falling stock markets and spiking volatility, the price of gold has soared by close to 20 per cent in 2016 from $1,060 to $1,253 a troy ounce, one of the strongest starts to the year for the metal in decades.
Investors who are perennially bullish on gold, known as goldbugs, can point to all sorts of plausible reasons for the outperformance. According to the World Gold Council, supply is tightening: gold mined in the fourth quarter of 2015 was down 3 per cent compared to the previous quarter.
At the same time, global markets are feeling the strain of a slowdown in China’s economic growth; concern for emerging-market stability; and the long-term effects of quantitative easing, or central bank intervention in financial assets.
Together they add up to uncertainty about the global economy that is pushing investors to seek safety.
Buyers are changing too. In the past, India and China led demand, buying gold jewellery, bars and coins. Now western investors are increasing their buying via gold-backed exchange traded funds like SPDR Gold Shares, which means owning units in a trust that owns the gold. Holdings in these funds are at a year high, according to Commerzbank. For investors who want to hold gold, a store set up by Sharps Pixley in central London sells gold bars — £1,477 will get you 50g.
Central banks including Russia’s have been adding to their gold supplies in recent years, possibly in the hope that their currencies will be less inclined to weaken if their gold reserves are high.
But for some investors, buying gold is more akin to an act of faith than rational asset allocation. Gold does not pay out a fixed income like bonds or dividends like companies. It cannot be used for power like oil or for electrical equipment like copper. In 2011, then Federal Reserve chairman, Ben Bernanke, suggested that tradition is the reason investors buy gold.
“A lot of people believe gold is a store of value or a hedge against inflation,” says Mike Riddell, portfolio manager at Allianz Global Investors, “but I have no idea how to value an asset which has limited industrial use and no income stream. I have no interest in it. How can the price be justified?” This argument is backed by the fact that gold is not a perfect hedge against economic downturns and market volatility. During the 2008 financial crisis, gold prices strengthened, but last year’s market turmoil failed to raise them.
Julian Jessop, chief global economist at Capital Economics, thinks the metal is vulnerable to a short correction as the US economy recovers.
To Simon Derrick, chief currency strategist at Bank of New York Mellon, gold is interesting for the story it can tell about the rest of the world. “It’s a misanthropic investment that you can’t do a lot with,” he says. When its price goes up, he says, it is a sign that faith in central bankers is going down.
What next for the gold price?
Analysts at Société Générale think gold is overvalued and Goldman Sachs is predicting prices will fall to $1,000.
Then again, few market commentators predicted the rally at the start of the year.