Gold has long been considered a safe haven during times of market stress due to its reputation as a reliable store of value and hedge against uncertainty.
Global markets and economies were struck hard by the Covid-19 pandemic last year, with increased volatility and economic turmoil driving strong investor demand and a rise in the price of gold.
So far in 2021, the picture looks somewhat different as gold prices have pulled back from summer 2020 highs of more than $2,000 an ounce to a range between $1,600 and $1,900 amid a brighter global outlook.
Vaccine rollout programmes planted seeds of hope for a return to greater normality and the economic crisis was cushioned by major central banks implementing monetary policy measures to mitigate the impact of the pandemic.
The price of gold is down 7.4 per cent for the first nine months of 2021 as investors regained an appetite for riskier assets against the backdrop of an improved global economic outlook and fewer concerns on the downside. That said, inflation has emerged as one of the most relevant downside risks facing investors.
Gold has historically been regarded as an effective hedge against inflation, with the price of the precious metal typically rising in response to higher inflation.
As of September 30, US core personal spending inflation (excluding food and energy prices) soared above 3.6 per cent year-on-year, the fastest pace since the early 1990s.
Despite concerns about increased inflation, the gold price has fallen slightly. Other factors – such as a stronger US dollar and rising bond yields – may be outweighing the concern about rising inflation.
Most central banks have begun to normalise policy to keep inflation expectations anchored. Central banks are slowing asset purchases and signalling interest rate increases. Hikes in interest rates imply higher yields, which reduce the appeal of gold as a zero-yield asset.
Gold historically performed well against a weakening US dollar, yet the greenback outperformed all major developed market currencies in the third quarter on the back of higher yields and the expectation of imminent tapering of asset purchases by the US Federal Reserve.
It is worth noting that although the price of gold has come down from its 2020 highs, it has not fallen back to pre-pandemic levels.
The risk of a longer period of high inflation as well as the downside risk from rising geo-political tensions and new virus variants or waves contributes to lingering uncertainty, helping to account for the high level of gold prices.
The precious metal broke above $1,800 several times in the third quarter, ending the period at $1,757 an ounce.
With all these moving parts, how should investors be looking at gold now? Does it still have a place in an investment portfolio? We believe gold will probably continue to serve as an effective hedge against the looming uncertainty.
We are still facing an uncertain outlook for the global economy, with regions continuing to fight the virus crisis as new outbreaks swell. Inflation is at higher levels and appears more persistent than hoped. Geo-political and geo-economic tensions persist between the US and China, the US and Russia and elsewhere around the world.
Gold is known to act as a diversifier in a balanced portfolio, helping to mitigate losses during market downturns or periods of uncertainty. It is highly liquid, has a proven store of value and its volatility has been stable compared with other major asset classes.
There are many ways for investors to add gold to their portfolio, from buying physical bullion or purchasing jewellery to investing in mining companies or gold-backed exchange-traded products, including several Sharia-compliant ETPs for investors in the Middle East.
As ETPs are exchange-listed products that trade throughout the day, exposure to gold can be accessed quickly and easily. ETPs enable investors to gain exposure to price movements without having to buy and store physical gold directly.
How much gold can you bring in and out of the UAE?
Investors might opt to gain exposure to gold through futures, but given today’s market, the higher costs of margin and rolling from one futures contract to the next need to be considered.
Gold ETPs offer a low-cost, simple and efficient way to gain exposure to the commodity without the additional costs and complexities involved with some other types of gold investments (buying and storing without insurance, as an individual, incurs no additional costs).
Alessio Cirillo is EMEA sales director at Invesco.
