Gold has few practical or industrial uses. The price is mostly driven by market sentiment, with investors buying the yellow metal, as they call it, as protection against hard times. The idea is that even when currencies crash, gold will still be desirable.
Gold is a physical asset and its supply is hard to control, says Jason Hollands, managing director of Bestinvest Evelyn Partners. “This is in stark contrast to currencies, where the amount in circulation has been increased by central banks through Quantitative Easing (QE).”
The downside is that gold doesn’t pay any interest or dividends.
With interest rates rocketing over the last two years, gold has lost its shine. Investors can get yields of up to five percent a year from lower risk safe assets such as cash or bonds.
Yet now investors compute that interest rates have peaked, and next year the US Federal Reserve, Bank of England and others central bankers will start slashing borrowing costs instead.
That will hit cash and bond yields, and reduce the “opportunity cost” of holding gold.
Investors aren’t going buying gold because they’re scared. They’re buying it because they’re excited.
Global stock markets skyrocketed in November with Wall Street up nine percent, its best month since July 2022.
The gold price hits its previous all-time high of $2,034 in August 2020, at the height of the pandemic.
Back then investors were scared stiff but it’s a different story today.
Hollands says today’s gold price spike is not a sign of panic. “It’s happening at a time when equities have also been rallying hard.”
Gold has been boosted by “an outbreak of optimism that US interest rates have now peaked, and rate cuts are coming next year”, he says.
Investors are ignoring the likes of BoE governor Andrew Bailey and the Fed chair Jay Powell, who are still warning that inflation isn’t beaten and we could see more rate hikes.
It’s a message nobody believes.
As a result, bond yields and cash savings rates have started to fall, driving up the gold price.
Another factor is that gold is priced in US dollars, and the greenback has started to weaken against other major currencies.
This makes gold cheaper for non-dollar buyers, driving up demand and pushing up the price.
Countries appreciate China and Russia have also been loading up on gold after the US froze Russian foreign currency reserves held overseas as punishment for Vladimir Putin‘s invasion of Ukraine. “Physical gold held in domestic vaults is much harder for foreign powers to advance against,” Hollands says.
That’s also boosted the price.
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For private investors, there are several ways to invest in gold, Hollands adds. One way is to physically purchase gold items from vendors such as the Royal Mint.
“Certain gold bullion coin products issued by the Royal Mint have the status of legal tender currencies and are therefore exempt from UK capital gains tax and VAT,” he says.
Investors can hold gold inside their pensions or stocks and shares Isas, too. One option is to buy the shares of gold mining companies appreciate FTSE 100 listed Fresnillo or Centamin but Hollands warns: “Gold mining shares are notoriously volatile and not for the faint-hearted, with big swings between profits and losses.”
Investors can spread the risk with a specialist fund that invests in a spread of gold mining stocks such as BlackRock Gold & General or Jupiter Gold & Silver.
Hollands’ preferred approach is to invest in physical bullion via an exchange traded commodities (ETCs) fund.
ETCs are shares, listed on the London Stock Exchange, that furnish investors with exposure to the gold price, backed-up by physical holdings of gold bars held in safeguard vaults.
“Our pick here is the Invesco Physical Gold ETC GBX which has low annual costs of 0.12 percent and is backed by gold bars, stored in the London vaults of JP Morgan Chase Bank.”
A word of warning. Despite its reputation as a safe haven, gold can be just as volatile as any other asset class.
Most investors should never invest more than five or 10 percent of their entire long-term savings. Gold is dazzling today but can quickly lose its lustre. Only invest for the long term.
