The pandemic gold rush
As the gold price sets record highs, surging government debt levels, COVID-19 infection risks and low rates mean that the rally may have more to run.
- The gold price has surged by 30% this year as the commodity’s safe-haven appeal attracts investors
- While equities are setting fresh highs, caution seems warranted amid heightened uncertainty. The rally in the gold price looks far from over
- Central banks remain keen buyers of the commodity. However, this year’s recession has hit traditional demand and supply sources
- Gold still appeals as a portfolio diversifier, allowing investors to retain higher exposure to equities while hedging downside risk.
The gold price has zipped up 30% this year, hitting a record high and topping $2,000 an ounce for the first time. After such a strong rally in the price, is it still worth investing in the precious metal?
Gold, often cited as the ultimate safe-haven asset, seems to be increasingly popular in a highly uncertain world. Fears of a second wave of coronavirus, skyrocketing debt levels and November’s US presidential election are helping encourage investors to boost holdings in the commodity.
Amid the pandemic, the S&P 500 is up more than 50% from its March low, in the quickest recorded return to a bull market. The bounce in valuations is supported by shrinking containment restrictions and substantial fiscal and monetary firepower designed to fight the effects of the virus.
Nevertheless, sentiment seems fragile, with plenty reasons why equities may be unable to maintain upward momentum. Such caution has encouraged investors to hedge their equity positions. Gold has been a beneficiary, helped by its reputation as a store of value. The amount held by exchange traded funds has soared by 31% this year.
Low real rates
Gold’s traditional disadvantage is that it’s a zero interest-bearing asset. However, the pandemic has encouraged policymakers to respond aggressively. Central banks have cut interest rates, in some cases into negative territory, and ramped up bond-buying programmes.
While improving risk sentiment or rising bond issuance could push yields much higher, potentially tarnishing gold’s appeal, it is the real rate which matters, not the nominal one. And it is unlikely that bond yields will rise without higher inflation, which should keep real rates low.
Overall, it seems likely that sentiment will remain brittle for some time and that central banks may accommodate government debt purchases to allow additional borrowing. As a result, yields are likely to stay lower.
Pandemic hits demand and supply
Central banks have been one of the most significant buyers of gold over the past decade. Last year, the banks made their second highest level of annual purchases in 50 years.
While the investment demand for gold has aided the price, physical demand was dented by the COVID-19 interruption. For instance, jewellery purchases slumped by 46% in the first six months of the year as quarantined economies, elevated prices and labour market disruption discouraged consumers from buying the precious metal.
Turning to supply, mine production levels have surged over the past ten years. But virus-related disruption reduced supply by 5% in the first half of the year. Relatively high prices should encourage capital investment. That said, the long lead time often needed to exploit new projects means that production levels are usually slow to react to market movements.
Diversification attractions in tact
Buoyant investment demand and recovering physical demand suggests that the outlook for gold is positive. Indeed, the rally in the metal’s price this year may have further to run. The commodity has generated an average return of 11.2% per annum in the last ten years.
Gold continues to appeal as a diversification tool within a multi-asset portfolio. Investing in the metal can allow higher exposure to equities, an asset class that is likely to outperform in the medium term, while hedging downside risk.
Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.
- Has been prepared by Barclays Private Bank and is provided for information purposes only
- Is not research nor a product of the Barclays Research department. Any views expressed in this communication may differ from those of the Barclays Research department
- All opinions and estimates are given as of the date of this communication and are subject to change. Barclays Private Bank is not obliged to inform recipients of this communication of any change to such opinions or estimates
- Is general in nature and does not take into account any specific investment objectives, financial situation or particular needs of any particular person
- Does not constitute an offer, an invitation or a recommendation to enter into any product or service and does not constitute investment advice, solicitation to buy or sell securities and/or a personal recommendation. Any entry into any product or service requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding documents
- Is confidential and is for the benefit of the recipient. No part of it may be reproduced, distributed or transmitted without the prior written permission of Barclays Private Bank
- Has not been reviewed or approved by any regulatory authority.
Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.
Barclays is a full service bank. In the normal course of offering products and services, Barclays may act in several capacities and simultaneously, giving rise to potential conflicts of interest which may impact the performance of the products.
Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.
Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation. Law or regulation in certain countries may restrict the manner of distribution of this communication and the availability of the products and services, and persons who come into possession of this publication are required to inform themselves of and observe such restrictions.
You have sole responsibility for the management of your tax and legal affairs including making any applicable filings and payments and complying with any applicable laws and regulations. We have not and will not provide you with tax or legal advice and recommend that you obtain independent tax and legal advice tailored to your individual circumstances.
THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.