The gold rally has asset managers wondering whether the price is still right

Chinese leader Xi Jinping and Russian President Vladimir Putin pledged last week to work together against what they called the “destructive and hostile” US. And few commodities have been as affected by their policies as gold.

Just days later, on Monday this week, the price of the precious metal rose to a record high of $2,450 per troy ounce – bringing the gain to 25 percent since October 5, just before conflict erupted in the Middle East. It’s a rally supported by the breakdown of the global monetary system, as countries like Russia and China try to reduce their dependence on the US dollar.

However, with safe-haven trading at this all-time high, Chris Forgan, multi-asset portfolio manager at Fidelity, says: “The million-dollar question as an investor is: Is it still justified?”

Line graph of gold, $ per troy ounce, showing that Chinese demand has caused the gold price to rise

One of the confusing elements in assessing gold’s recent rally is the disconnect between two usually closely linked variables: the US dollar and the inflation-adjusted US Treasury yield.

“The jaws have opened between them,” said Forgan, who has cut his portfolio’s allocation to gold from 6 percent to 3 percent to capitalize on the recent price rise.

A key factor behind this decoupling is that central banks have been increasing precious metals in their reserves at an unprecedented pace since early 2022, to boost their resilience against Western sanctions that could weaponize the US dollar’s primacy in global trade.

$600 billionRussian US dollar reserves frozen by Washington after Russia invaded Ukraine

Officials led by China made their biggest ever gold purchases early in the year, buying 290 tons of the metal in the first three months, according to the World Gold Council, an industry group. The West’s move to freeze about half of Russia’s $600 billion worth of reserves, which are denominated in US dollars and euros, in the wake of Putin’s invasion of Ukraine was the main catalyst for the buying spree.

Added to this was a pivot in gold buying by Chinese consumers as real estate and local stock markets disappoint and concerns about persistent inflation and high global debt persist. All this has pushed the price of the precious metal up.

Even as expectations of US interest rate cuts were reversed in recent months, gold continued to rise.

John Reade, chief market strategist at the WGC, says this suggests that the reasons why people buy gold “really don’t have much to do with the US and Western financial markets”.

50 gram gold bars are sold as investments in Beijing © REUTERS

Instead, he believes the reasons have much more to do with what he calls “soft de-dollarization” – where countries outside the US network of allies diversify their reserves into gold, in part because no other currency is able to cash in to replenish reserves. the emptyness.

Gold exchange-traded funds, typically used by Western investors, continued to record net outflows in the first quarter of 2024, WGC data show – indicating the epicenter of the rally is in the Far East.

But the higher gold goes, the more macroeconomic headwinds – such as a stronger dollar and higher real interest rates – limit the commodity’s ability to move higher, said Nicky Shiels, head of metals strategy at MKS Pamp, a Swiss refiner. trader. These were the key factors that caused the gold rally to retreat in late April and remain stuck around $2,300 per troy ounce for a fortnight, she argues.

However, that also worked the other way around. Softer US inflation data last week boosted traders’ expectations that the Fed would cut rates twice this year, which would benefit non-performing assets as bond yields decline due to the decline in real interest.

“I hesitate to say that what you’ve seen is a systemic change in the drivers of the gold price,” says Fidelity’s Forgan.

Many fund managers are convinced that the risks in geopolitics and the fiat currency system are only increasing. They cite major conflicts in Ukraine and the Middle East, a US election that could herald Donald Trump’s return to the White House, persistent inflation and the global debt burden of $315 trillion, based on data from the Institute of International Finance.

That, they say, creates a crucial role for gold as a tool for wealth preservation, because gold tends to rise when many other asset classes fall and during times of global unrest.

Alex Chartres, fund manager at asset management group Ruffer, argues that “you want to own things that governments can’t print” while the only likely solution for the US to solve its debt crisis is “financial repression”.

Steven Jermy, a renewable energy executive who served in the British Royal Navy for 34 years, agrees – and keeps most of his wealth in precious metals. He estimates that gold prices have about 30 percent additional upside potential as he believes the US will have to inflate its way out of its debt situation. “If you take bonds and stocks, they generate returns, but they are offset by inflation,” he says.

However, others suggest that global risks are overstated and that gold will do little to maintain prosperity even if the global economy turns negative.

Arnim Pinateau, who recently retired after a career in accounting and human resources, says he will never invest in gold because he has had only a few bad years in his 45 years of investing in bonds and stocks. Moreover, he believes that war in Western Europe has “not a high probability” in the next five years. “I remain in my ‘no gold’ position and keep as a memory the coin my grandfather gave me for my tenth anniversary,” he says.

Gold prices could even be dragged down if Chinese consumers lose their newfound taste for precious metals as a way to preserve their wealth.

But with Beijing having no easy way to reverse economic sentiment, global risks rising and dormant Western investors willing to buy gold once they’re convinced the Fed will cut rates, most portfolios are likely to find a place for an asset with a 5,000 year history of protecting wealth.

“Gold is a portfolio diversifier and a hedge against monetary and geopolitical instability,” says Chartres van Ruffer. “We expect to see more of both this year as we enter an era that is more sensitive to inflation and more volatile.”

Additional reporting by Susannah Savage

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