This morning I listened in to an interesting webinar on gold and its prospects from WisdomTree Investments. A number of my clients hold a gold ETC (Exchange Trade Commodity) from iShares or WisdomTree (formerly ETF Securities). An ETC is a low cost security that tracks the spot price of gold without the investor having to take physical delivery of the metal nor pay for storage and insurance costs.
Gold is traditionally viewed as a safe have asset and hedge against geo-political risk and inflation. The performance of gold is highly correlated to the US consumer price index. Returns tend to be uncorrelated with other assets and gold plays an important role as a portfolio diversifier. Of course one downside of gold is that it pays no interest but WisdomTree made the valid point that this is less of a detraction for investors given globally there is $12 trillion of negative yielding bonds. Finally central banks have been net purchasers of gold since 2011 reversing a multi-year trend of them being sellers.
After a strong rally in January and February gold hit a peak on 7th March of $1,700 per ounce but it has sold-off since. Currently it trades at $1,471 (Source: Bullion Vault, 19/3/20 @ 13.48 p.m.) This is counter-intuitive to its supposed safe haven status, something that has puzzled investors. You would have expected gold to have rallied in the last few weeks with the spread of the Coronavirus pandemic and the damage to the global economy and stock markets. WisdomTree consider that it has been a liquidity driven sell-off which has also affected US Treasuries* another safe haven asset, with investors selling to meet margin calls. These are contractual cash deposits investors must make to a futures broker to maintain their account at a minimum level when securities fall in value. In other words gold and Treasuries have been treated as near cash i.e. liquid, easy to access money. That makes sense.
Another interesting point was that during the global financial crisis in 2008 the price of gold fell initially even in the aftermath of the collapse of Lehman Brothers. It then rallied from a low of around $735 per ounce in early October to a high of nearly $1,918 in August 2011. If gold follows the same trajectory prices may rise in the current crisis. WisdomTree modelled two scenarios – a V shaped recovery and a U shaped one. In the former the gold price would go higher than today for the rest of the year, peaking at $1,965 in the third quarter and then decline in the first quarter of 2021 to $1,370. With a less favourable U shaped recovery with a longer downturn in the markets, gold prices would go higher for longer breaking through the $2,000 barrier in the next four quarters. These models require making complex assumptions about federal reserve policy, the dollar exchange rate, nominal yields on bonds and speculative positioning forecasts so the numbers must be treated with caution but the conclusion is clear, the case for gold is good and the worse the economic downturn, the more attractive the shiny metal becomes. The nightmare L shaped recovery was not discussed but you can guess what impact this will have on gold.
It must be remembered although gold is a safe haven asset it is volatile one and there have been long periods were prices were depressed or flat. Other candidates as defensive assets include US Treasuries, UK Gilts, the Swiss Franc and the Japanese Yen. The ultimate is of course cash which is most attractive when inflation is low.
*US government bonds.
The content of this blog is based on my understanding of the investment case for gold. It is intended as general investment information only. Nothing in this article should be construed as personal investment advice for example to invest in gold or other safe haven assets mentioned. You should seek individual advice based on your own financial circumstances before making investment decisions.