Why not gold?

27 June 2019

3 minute read

While the price of gold has soared in the last few months, we explore why the safety apparently on offer may be illusory.

Who's it for? Confident investors

What you’ll learn:

  • Why has gold soared in recent weeks?
  • Why gold may not be as safe as people think
  • Where to invest

Many investors seem to be succumbing to the appeal of gold at the moment. The price of the yellow metal has soared in the last few months. This has been driven by escalating trade tensions and the fact that ever larger chunks of the government bond market have been sliding into negative returns (when adjusted for inflation). This week we explore why the safety apparently on offer with gold may be illusory.

Why the reputation?

Gold’s admirers, and there are many, cite its thousands of years of practice as a store of value. Those suspicious of new-fangled monetary experiments such as quantitative easing see it as an attractive piece of investment armour. In the same vein, many long for a return of the time when economies, or specifically the value of their currencies, were tethered to this fixed supply of gold. These same disciples tend to see the final shift away from the gold standard in the early 1970s as the source of most of our economic ills, as if there were none before.

The other point to mention about gold, and this can apply more widely, is that if enough investors believe gold to be a safe haven then it may well act as one. As Warren Buffet suggested when asked to comment on gold’s popularity – “the rising price on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As ‘bandwagon’ investors join any party, they create their own truth – for a while.” The same has only recently been true of crypto currencies.

Why do we disagree?

For most financial assets (with the exception of gold), investors can ascertain an appropriate value from dividends, coupons or other forms of cash flow. These rewards from ownership give us a shot at establishing whether something is expensive or not. For gold, we must rely on the prevailing price determined by current supply and demand.

One area where there has been a meaningful relationship is between gold and inflation adjusted bond yields (the return to an investor taking inflation into account). The intuition here is that the relative attraction of gold declines as the real (inflation adjusted) yield available on other, more plausible, safe havens rises and vice versa. Why would you buy gold, which throws off no cash flows or coupons, when you can lend the US government money with a yield above inflation so to speak. This relationship has waxed and waned over time, but it is interesting that the recent surge in the popularity of gold has occurred under the umbrella of plunging real yields around the world.

Perhaps the most important point for investors looking for shelter from the various storms is that gold has been an inconsistent ally in tougher market backdrops. If it is a safe haven you are looking for, then short-maturity US bonds are likely a truer friend. Certainly in nominal terms, they have a much less patchy track record amidst equity market falls.

Investment conclusion

Gold does have some diversifying appeal. However, it is gold’s volatility and unpredictability that should rule out a dominant role in portfolios. The backdrop, particularly the low to negative real interest rates around the world, is perhaps conducive for both at the moment, however this is not a backdrop that we currently expect to remain in place. In the absence of a recession, we think real bond yields have the potential to move materially higher, which may make life difficult for these coupon-less, momentum assets. Until then, we should expect more investors to be sucked into their orbit. However, without fundamental support this is a bandwagon we will likely continue to be wary of.

Where to invest

The Barclays Ready-made Investments are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest across a range of asset classes and regions, offering a globally diversified one-stop solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.

Smart Investor offers a wide range of funds, and our Barclays Funds List may help you to narrow down the wide range available to invest in. These funds are selected by Barclays investment specialists and, based on our research, they’re the funds that we believe have the potential to generate consistent returns over the medium to long term.

These funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

All of these investments can fall in value as well rise; you may get back less than you invest.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances. Smart Investor doesn’t offer personal financial advice. If you’re not sure about investing, seek independent advice.

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