Nine years after the last rally collapsed, a new gold rush is in full swing.
This week, prices rocketed to record highs above $2,000 per troy ounce for the first time — a 36 per cent ascent in the year so far that far outstrips any stocks index.
Even with prices at these lofty nominal levels, few are calling for a drop, prompting some to warn of a bubble and stunning even veterans of the industry.
“I’ve been active in the gold market for 35 years, and this is probably the most abrupt shift I've seen,” said John Reade, chief market strategist at the World Gold Council and a former gold trader.
Much of the latest rally stems from central banks’ efforts to shield the global economy from the worst effects of the coronavirus pandemic. Interest rates in major economies, which had started to pick up after the last financial crisis, have now headed back close to zero. That, plus central banks’ aggressive bond-buying programmes, has crushed the returns available to buy-and-hold investors in government debt and left little further room for price appreciation.
Meanwhile, inflation expectations, while low by historical standards, have ticked higher. That leaves gold, typically second-best to bonds because it does not provide interest payments, in a sweet spot. Its upper limit is confined only by what the next buyer is prepared to pay.
Gold “has become an increasingly important part of portfolios in a low-yield world”, said analysts at UBS.
Some of the most prominent hedge fund investors have, in many cases reluctantly, turned into gold supporters. In a letter to investors in May, Paul Tudor Jones of Tudor Investment Corp said a simple ratio tracking the value of gold above the ground to global money supply suggests the price could reach $2,400 an ounce. If demand becomes as extreme as it did four decades ago, before then Federal Reserve chair Paul Volcker ratcheted up US interest rates to tame inflation, prices could reach $6,700, Mr Tudor Jones wrote.
“Gold remains a very attractive hedge against the ‘Great Monetary Inflation’ and hedges against other risks clouding the outlook, including a renewed flare up in the China-US relationship where financial sanctions could eventually be used in a brute-force decoupling,” Mr Tudor Jones added.
Jewellery demand is not a factor here; demand for wearable gold has collapsed in key markets including India since coronavirus struck. Instead, much of the support comes from exchange traded funds tracking the price of gold.
One such ETF, SPDR Gold Shares, has this year snapped up physical gold to match investors’ demand at a record-breaking pace. The size of the fund’s holdings — which are held in HSBC’s London vaults — has climbed to more than 1,200 tonnes, making it a bigger gold holder than the central banks of either Japan or India.
Gold bulls say the metal is still under-owned by historical standards. Bank of America said global investors now keep about 3 per cent of assets in gold, half the size of allocations in 1980. Jim Luke, a fund manager at Schroders, said gold-backed ETFs represent about 2.5 per cent of global ETF holdings, compared with 10 per cent in 2011.
Some analysts are concerned about a repeat of gold’s previous sharp rallies in the late 1970s and in 2011, after which prices collapsed by 55 per cent and 33 per cent in the following five years. In addition, the runaway price rises that many gold enthusiasts are predicting may not materialise; investors such as billionaire John Paulson were wrongfooted after the 2008 crisis when inflation did not appear.
Campbell Harvey, a professor of finance at Duke University, said gold was an “unreliable hedge” against inflation fears in the short term because it was too volatile. He cautioned that the rush into gold-backed ETFs looked like “irrational exuberance”, citing Warren Buffett’s quote that gold buyers could be “bandwagon investors” who “create their own truth”.
“It’s a classic situation where people are buying when prices are going up,” he said.
Still, the surge in demand is a boon for operators of gold vaults. IBV International Vaults has built a facility in London with “Fort Knox security” near the Dorchester Hotel. Here, investors will be able to store the metal behind bulletproof glass built to comfortably withstand the force of an AK-47 — backed up by biometric security and monitored by three separate control rooms.
The opening of the new vault, which had been scheduled for the start of this year, has been delayed by coronavirus. But inquiries have risen. “We are seeing a lot more people who are nervous of the banking system and looking to hold their wealth outside of the conventional banking system,” said Debra Thomson, head of sales at IBV Gold.
“If you look at dollar weakness or local currency weakness, having a physical product like gold or silver . . . they get the feeling that they’re controlling their wealth by holding it in a physical object.”
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