Is now the time to buy gold?

Investors nervous about the stock market bull run and resurgent inflation could buy bullion as a safe haven

The precious metal has been out of favour since its price peaked at $2,084 an ounce in August 2020, at the height of pandemic uncertainty. Getty Images
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Contrarian investors believe the best time to buy an asset is when it is out of favour and the price has fallen, as that way you can pick it up on the cheap. Then you simply sit tight and wait for the market cycle to swing back in your favour, driving up the price.

If you think that’s a workable strategy, then there could be a good argument for loading up on gold right now.

The precious metal has been out of favour since its price peaked at $2,084 an ounce last August, at the height of pandemic uncertainty.

It was fulfilling its function as a traditional safe haven, rising in value as investors abandoned volatile stock markets.

Last November’s Covid-19 vaccine breakthrough was great news for stock markets as investors flooded back, but bad news for gold bugs.

The price slumped to a low of $1,685 on March 31, down 20 per cent from its peak. It has since crept up to $1,818 at the time of writing, but remains below its peak.

There are two reasons why, in normal times, we would expect gold to rise further. First, the precious metal is a traditional hedge against inflation, which is back with a vengeance.

Last week's US inflation figure came in at a shock 4.2 per cent, well above the anticipated 3.6 per cent. It could rise higher, as President Joe Biden unleashes another $6 trillion of stimulus.

Second, the gold price usually climbs when stock markets crash. The S&P 500 index of top US stocks blasted through 4,000 for the first time at the start of April, but now looks overvalued as jobs growth disappoints and higher inflation threatens.

Yet the gold price did a strange thing when that inflation figure spooked equity investors. It also fell.

As investors get a higher yield from bonds, this increases the opportunity cost for holding gold

This suggests that gold may fail to fulfill its traditional role of protecting investors against rising inflation and falling stock markets this time round, says Fawad Razaqzada, market analyst at Think Markets.

The big downside of holding gold is that it does not pay any interest or dividends, in contrast to cash, bonds or shares. That has been less of a problem lately, with rival safe havens such as cash and bonds offering investors near-zero returns.

However, rising inflation is now driving up bond yields, with yields on benchmark 10-year US Treasuries more than tripling in the past year to 1.69 per cent. Many analysts now expect them to blast through 2.5 per cent.

As investors get a higher yield from bonds, “this increases the opportunity cost for holding gold. As a result, it has been selling off a little along with risk assets”, Mr Razaqzada says.

Bizarrely, gold now has something in common with big US tech stocks such as Amazon, Google-owner Alphabet, Facebook and Netflix. None of these companies pay dividend income, as these stocks do not pay dividends, while Apple and Microsoft yield less than 1 per cent.

These two very different asset classes could struggle alike if bond yields continue to rise, Mr Razaqzada says.

A full-blooded gold price rally requires a rush of safe-haven seekers, but that isn’t happening yet, Carsten Menke, head of next generation research at private bank Julius Baer, says. “Given our constructive economic outlook, for the US as well as globally, we do not expect safe-haven demand to return anytime soon.”

He believes the world faces “good inflation”, resulting from the economic recovery, and not “bad inflation”, signalling a loss of trust in the world’s major currencies. “Only the latter would be bullish for gold and silver.”

Given our constructive economic outlook, for the US as well as globally, we do not expect safe-haven demand to return anytime soon

Mr Menke is particularly cautious about precious metal silver, “as compared to gold we believe it trades on elevated levels”.

There is another reason why safe-haven investors have been giving gold a miss. They have a brighter, shinier toy to play with in cryptocurrencies such as Bitcoin, Ethereum, Dogecoin and others. Crypto fans say the asset class has now invaded gold’s territory as a store of value and inflation hedge, but with added excitement.

Demand for gold was always likely to slow after last year’s record inflows, despite a rebound in Asian jewellery demand and will continue to tread water while crypto grabs all the attention, Adrian Ash, director of research at BullionVault, says .

Gold may be out of fashion today, but that could be an opportunity, Mr Ash says. “Longer-term investors wanting to spread their risk could do well to consider adding a little bullion to their portfolio at these lower levels,” he adds.

Cryptos may be riding high but look vulnerable as central banks tighten regulations, and gold could be the beneficiary, Jason Cozens, chief executive of Glint, which allows customers to spend gold as money, warns.

“While the value of gold can decline over time, it has proven its long-term reliability, is far less volatile compared to cryptos and many view it as a vital asset to hold in times of uncertainty.”

Meanwhile, Rhona O’Connell, head of market analysis for EMEA and Asia at StoneX Group, also believes “gold has upside potential”, as the post-Covid-19 recovery still relies on government stimulus and the outlook remains uncertain.

There is “a tremendous amount of liquidity still looking for a home” with an incredible $12 trillion added to central bank balance sheets, according to the International Monetary Fund, and some of this will end up in gold, Ms O’Connell says.

As confidence grows in the west, so does appetite in the Gulf, South Asia and South-East Asia, Ms O’Connell says. “Buying has picked up smartly, even with India experiencing a fresh wave of infections.”

The gold price is always hard to predict as it is an “inert lump of metal” with no industrial uses, unlike silver, and that remains the case today, William Ryder, equity analyst at Hargreaves Lansdown, says.

Longer-term investors wanting to spread their risk could do well to consider adding a little bullion to their portfolio at these lower levels

“On the one hand, inflation worries and persistent economic uncertainty are likely to support prices. On the other, a smooth recovery and low inflation could prompt investors to invest in productive assets instead of inert lumps of metal,” Mr Ryder says.

One thing hasn’t changed. Holding a nugget of gold in your portfolio provides comfort at times of market stress. Most advisers recommend keeping 5 or 10 per cent of your total invested wealth in the precious metal.

As well as buying physical gold and jewellery, you can track the gold price by an exchange-traded fund.

Look for one that buys physical gold, rather than complex derivatives designed to track price movements, such as the SSGA SPDR Gold Trust, which is up 45 per cent over five years, but down 6 per cent in the past 12 months, or iShares Gold Trust, Russ Mould, investment director at online wealth platform AJ Bell, says.

Alternatively, you could invest in the shares of gold mining companies in the hope of generating a higher return and some dividends, too. The Van Eck Vectors Gold Miners ETF is up 58 per cent over five years but down 3 per cent over 12 months.

The Van Eck Vectors Junior Gold Miners ETF targets smaller mining companies and is more volatile, falling 6 per cent over five years but up 18 per cent in the past year.

Actively managed mutual fund BlackRock Gold & General is also popular. It is up 50 per cent over five years, but down 2.7 per cent over the past year.

Gold is not shining right now. That could make it a tempting time to buy, especially if you aim to hold for the long term – as you should.