What?

At the time of writing, the price of gold is at or close to its all time high and in 2024 YTD its returns have even outpaced those of a strong equity market. But does that mean that investors should now shy away from investing in the yellow stuff? Not necessarily, in our view. On the contrary in fact, there are a number of relevant arguments which point towards gold actually being in a long-term secular uptrend and which make it a smart choice as part of a diversified investment portfolio. Read on…

Why?

Gold has dazzled people, whether investors or not, for centuries. If you’ve ever been to a physical gold market you will know that it’s a truly captivating experience and the allure of gold shows no sign of losing that appeal.

The price of gold has been on a rip throughout 2024 driven by a number of factors but despite the price being at all time high there is logic in asserting that many of these factors remain, and will continue to remain, strong drivers of the price of gold going forward, meaning that gold continues to offer a compelling investment opportunity for investors to include some exposure to it in their portfolios. In fact, many Wall Street brokers have target prices for gold that are comfortably above its current level.

Let’s dig into what the trends and drivers are that are buoying the price of gold:

1. Central bank buying: central banks around the world have been gobbling up gold. Arguably this started after the Financial Crisis in 2008 because as some big financial institutions started to fail without the hope of a bailout and suddenly the cash held by these institutions appeared in threat, gold emerged as an alternative store of value. Between then and now, Russia has been increasing its buying of gold as its own hedge against sanctions that were first applied against Russia (confiscation of Dollar assets) and more recently it appears that China has been buying more, again as a hedge against possible (though not confirmed) US sanctions. So ongoing central bank buying, in large quantities, continues to be one of the key drivers of gold, if not the key driver.
2. The combination of cultural allure and economic growth: In many countries around the world gold is almost revered and is seen as an equivalent and indicator of wealth. A great example of a country where gold is highly coveted is India and this becomes even more significant when considering the economic development of a nation like India and the way in which ongoing new wealth creation will fuel a greater demand for gold. China is another good example of this.
3. Hedge against currency devaluation: As governments accumulate large amounts of debt, they may resort to expansionary monetary policy, i.e. money printing, to manage the debt burden. This can lead to currency devaluation. Gold is priced independently of any government-issued currency and tends to retain value as ‘paper currencies’ weaken.
4. De-dollarization trend: Several countries globally are exploring alternatives to the US dollar for global trade and to reduce their reliance on US dollars, including gold-backed currency systems, which again may underpin gold’s long-term structural demand. As the US dollar weakens, gold often strengthens.
5. Limited Supply: Gold is a very scarce commodity and basic economics dictate that restricted supply and strong demand result in upward pressure on prices. It is becoming harder and more expensive to mine, with fewer large deposits being discovered. Therefore, supply is restricted.
6. Geopolitical Conflict: Gold is famously used as a hedge in geopolitical conflict and times of turbulence, making it a go-to investment during times of crisis. Given the ongoing events of this nature on a global scale, gold continues to shine.
7. Strong liquidity: The gold market is very liquid and getting exposure to gold via ETFs, with all the benefits of ETFs that we have written about previously, means that investing in gold is easier than ever.

How?

As usual, for any investors who are considering exposure to gold in their portfolio, ETFs present a sensible way to do so with all of the usual benefits of ETFs.

There are several very established ETFs in the market that provide exposure to physical gold and these are probably a good place to start.

An alternative, less obvious way, is an ETF which provides exposures to gold mining stocks, i.e. to the companies that are involved in gold mining and therefore stand to benefit from the prices mentioned above.

Not financial advice, posts for informational purposes only, always do your own research.