Commodities 

Has gold lost its shine?

This article is part of
Guide to investing in commodities

Has gold lost its shine?

Gold has historically been globally recognised as the ultimate safe haven asset to hold in times of geopolitical turmoil.

Some hold the precious yellow metal for cultural reasons, while other investors use it to diversify their portfolios.

But gold can take multiple forms and with commodities having suffered bearishness in recent years, has physical gold lost its shine?

Or do investors prefer alternative forms, or no exposure at all to hedge their portfolios?

Bullion

Most commentators in the industry stress that physical gold in the form of gold bars, jewellery or coins – also dubbed bullion – is lagging other types of gold investments.

Caroline Bain, chief commodities economist at Capital Economics, explains: “Physical gold demand (ie, for jewellery, rather than investment demand) has been lacklustre, at best, in recent months."

At the time of writing, the price of gold was £983.52 per troy ounce. In comparison, this is higher than when the price hit a low of £701.29 per troy ounce in July 2015, according to data from online bullion dealer, BullionByPost. This is also higher than the gold price level seen in the first half of 2018. 

Geoffrey Cher, business development lead at Digix, says: “Owning physical gold puts individuals in full control of their assets, removing the risk of a counterparty in the form of governments or big corporations and enterprises.

“Moreover, accredited members of the London Bullion Market Association (LBMA) have branches all over the world, providing the possibility of physically storing your gold in multiple geographical locations, avoiding concentration risk in one continent.”

Juan Carlos Artigas, director of investment research at the World Gold Council, notes an uptick in several types of gold investments over recent years.

“Gold investment demand has grown, on average, 15 per cent each year since 2001. The largest share of demand (about 90 per cent) is linked to bar and coin demand, especially since it’s still the only way to buy gold in many markets,” he points out.

But, he adds: “Since 2004, gold-backed exchange-traded funds have gained popularity, with cumulative holdings worth more than £100bn ($76.7bn) and having grown 40 per cent over the past four years.”

Gold derivatives

This view is echoed by Adrian Ash, director of research at BullionVault.

Mr Ash says: “Physical gold trading through London, the heart of the world's bullion trade, has been overtaken in notional value by trading in US gold derivatives.

"I think that reflects both the perceived retreat of counterparty risk since the banking crisis and also the abundance of low-cost credit offered to hedge funds."

Ms Bain says: “Gold investment has been increasing on the back of safe-haven demand at times over the past six months, generally rising when bond yields have dropped back and risk aversion has increased.”