News Analysis: Gold’s purple patch halts

On Monday July 20, the cost of bullion tanked to a five-year low, reaching $1,088 per ounce, a level it had not hit since March 2010.

On the previous day, the US Comex Exchange endured a steep increase in gold volumes; in just four minutes $1.3bn was traded and within seconds selling spread to the Chinese markets. Ultimately Asia offloaded more than $1.7bn when markets opened.

Investors have since pointed to the strength of the US dollar and the prospect of tighter US monetary policy as the main culprits for the sell-off.

While gold recovered some of its losses, with the yellow metal rising to circa $1,095 by July 29, its price remains 16 per cent down from its 2015 high of $1,301, which it reached on January 21 – and 42 per cent off its 2011 all-time high of $1,921.

Year to date, miners of the metal have fared even worse, with the FTSE Gold Mines index down by 24 per cent to July 28, according to data from FE Analytics. In the past 12 months, the index has dropped a hefty 43 per cent. Naturally, funds that invested in gold, miners and related stocks have felt the brunt of the fall, with, for example, the Investec Global Gold and BlackRock Gold & General portfolios down 41 and 36 per cent respectively over one year.

While gold has historically been viewed as a ‘safe-haven’ asset, the recent 30 per cent fall in Chinese shares has barely rattled investors’ nerves. Bullion has also historically been used as a hedge against inflation and a weaker US dollar. However, both these factors appear to be causing little concern as the cost of living remains low and the greenback has been stubbornly strong.

Axa Wealth head of investing Adrian Lowcock believes that while the short-term outlook for gold is generally negative, investors should still consider the potential role it can play in a portfolio.

He says: “In the short term gold could be volatile as investors digest the recent swings. However, as the US economy continues its recovery and looks to raise interest rates, supporting the strong dollar, we could continue to see pressure on the gold price.

“But gold can provide a hedge and protect investors if there is an equity sell-off. For those who do not have exposure, now could be a good time to build that up.”

The recent turmoil engulfing the commodity has not put off NN Investment Partners’ multi-asset team moving such precious metals as silver and gold to “overweight”. Koen Straetmans, senior strategist on the team, says that in spite of still weak demand seasonally, precious metals may find price support in the near term.

“The Greek uncertainty is expected to linger on, potentially bolstering ‘safe haven’ demand,” he says. “Also, if a ‘Grexit’ nevertheless materialises or if we gradually move in this direction the ECB [European Central Bank] is expected to intensify its contagion measures including QE [quantitative easing].”

James Calder, research director at City Asset Management, admits gold has not been part of his asset allocation for a number of years – and he would not buy it right now as he feels there is further pain to come in the short term. But given the extent it has fallen since its 2011 high, for an adventurous investor with no current exposure, “there may be a buying opportunity”.

He adds: “The fall in the oil price may actually help gold miners as the price of diesel, which is used in mining machinery, drops. But apart from physical gold’s intrinsic value, it has very little use and has no yield.”

Smith & Williamson Global Gold & Resources fund manager Ani Markova believes, based on her current expectations, that gold could rebound to around the $1,200 to $1,300 per ounce mark over the coming 12 months.

She notes that in five out of the past six rate hike cycles, gold in the preceding months took a tumble. However, in four out of six cycles after rates were raised, gold either outperformed or its value remained flat.

Ms Markova says: “Once we remove the uncertainty regarding the Federal Reserve interest rate hike, I believe gold could outperform.”