Holding gold in one’s portfolio can be a frustrating experience, warns Craig Basinger, Chief market strategist at Purpose Investments. The mythical metal can misbehave.
Sometimes, the stars seem to align for gold: positive retail/bank flows, falling real yields, a weaker U.S. dollar, and war breaking out somewhere. Yet, lo and behold, “the price of the yellow metal does nothing or, even worse, goes down,” Basinger notes. Even during the higher period of global inflation from mid-2021 till the end of 2022: “Gold went down 5% – meaning it went down a lot more if you adjusted for inflation,” he adds.
Today, many key factors are aligned that would normally drag the price of the precious metal down: a strong U.S. dollar, higher real yields than we have seen in a long time, investors pulling money out of gold ETFs, and inflation on a downward path. “Yet, the price of bullion has reached a new all-time high,” Basinger observes, “Welcome to the world of gold!”
What’s Pushing Up Gold Prices?
“Gold is just at one percent off its all-time record high,” points out Robert Cohen, portfolio manager of the gold-medalist Dynamic Precious Metals Fund F. He agrees with Basinger’s reading, but on the other hand, finds several factors and influences that can help explain gold’s apparent “misbehaviour”.
First, the U.S. dollar is still strong, but it has been weakening, Cohen notes. “Two years ago, the DXI (U.S. dollar index) stood at US$1.15, but now it’s at US$1.03. So, it’s on a bit of a downward trend.”
Also, central banks have been “mopping up” gold for the last eight consecutive months, Cohen notes. China has been an important buyer, continuing its foreign reserve diversification away from the U.S. dollar. “Chinese jewellery demand is also exploding,” Cohen adds, “which indicates that you have people seeing bad economic conditions ahead.”
Mid-March hit markets with a negative surprise. Most players saw a 61% possibility that the U.S. Federal Reserve would make three rate cuts before the end of 2024. Now, according to the CME FedWatch Tool, that possibility has fallen to around 30% (as of March 20, 2024). The stickiness of inflation is playing tricks on markets and the Fed, always delaying further the much-expected rate cuts. Finally, there is growing concern about the mass of debt weighing on the global economy and about fiscal policies “that are increasingly disastrous,” Cohen points out.
Forces on Gold Are Connected
Many elements are coalescing to push the price of gold upward and consolidate its role as a store of value for more trying times. “There’s a weakening of the U.S. dollar which is linked to inflation, and that flows into lower real rates; all these things are connected, and they are bullish for gold,” sums up Jon Mills, Equity analyst at Morningstar Australasia.
Gold Prices And Investor Sentiment
In fact, with all the forces at play, one could ask why gold is not rising faster and higher. “One major thing lacking is investor sentiment,” Cohen answers. With investors choosing to chase bitcoin and NVidia, the sentiment is just not there.”
Still, gold has garnered enough momentum to break the significant threshold of US$2,100. Is it trying to tell markets about impending challenges, like a coming recession rather than the much heralded soft-landing?
Maybe, but not sure. “It could be a driver,” Mills acknowledges, pointing out at the same time “that investors flock to gold when they see the economy deteriorating.” And that deterioration is presently not obvious. Cohen is more attuned to the probability of a recession, but far from certain. “I think there are signs of a recessionary environment, he says, unless central banks lower rates somewhat.”
Should I Buy Gold Now?
Is it time to buy gold? 2024 is likely to see some volatility with changing interest rate expectations, but Cohen is optimistic about gold prices: “It still has a way to go; we have a lot of bullish signals,” he claims. Basinger is more reluctant. “We do remain positive about having a small gold allocation within portfolios even after the recent run-up, he recognizes; not sure we would be going out to add gold after this sharp rise, but we are not reducing at this point either.”
At this point, investors may do better picking up gold stocks rather than the physical bullion. Basinger sees more opportunity on that front. The price of gold stocks has lagged the price of the metal, and he recognizes that there are operational issues with the larger cap gold companies, notably rising costs and country-specific problems. However, the divergence between both assets has become quite large in the last few months. “We did pivot some of our exposure from bullion into gold mining stocks, he acknowledges.” There is a greater margin of safety in stocks, he believes, and better upside potential.
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