Investors warned against gold rush as price rockets

Investors warned against gold rush as price rockets

Investors have been urged not to pile their cash into gold off the back of the precious metal’s soaring price tag, warning there could be a correction or even downwards slide in the months ahead.

Earlier this week the price of gold topped $2,000 (£1,527) an ounce for the first time as demand increased from investors looking for a safe haven.

But investors have been warned not to react by rushing to gold “in a big way”, despite circumstances looking positive for the precious metal.

Ben Yearsley, consultant at Fairview Investing, said: “There is lots of speculation that gold will go to $2,500 an ounce…[and] conditions are looking good for gold with record low rates, money printing and question marks about the dollar as reserve currency.”

However he said the “flip side” was that gold had already had a “rather good run already this year”, adding that those not invested already should not “go in in a big way”.

Tom Sparke, investment manager and GDIM, agreed. He said: “I would be cautious about adding a meaningful allocation at this point as, while the rally could well continue, if we saw a breakthrough such as a vaccine for Covid-19, there could be significant downside in a very short period.”

Mr Sparke added that gold was also a “difficult asset” to gauge as there was very little one could do to empirically measure its value.

He said: “It does not have a yield and therefore carries a cost that cannot be mitigated, but it has proved to be a very effective hedge against market weakness.”

The price is up 32 per cent in the past year and today sits at $2,054 (£1,569) an ounce.

Gold and precious metal portfolios have boomed from the rise. The vast majority of the best performing funds — eight out of the top 10 — were gold funds in July, returning between 10 and 20 per cent in just 31 days.

Mr Yearsley said: “Is it any surprise that gold has had an excellent run recently?

“Quantitative easing has been on steroids in recent months, which could be inflationary at some point and may well have a debasing effect on currencies.”

Top 10 - July 2020Return (%)
Charteris Gold & Precious Metals19.64
MFM Junior Gold18.09
Merian Gold & Silver17.9
ES Gold & Precious Metals17.17
Ninety One Global Gold12.21
Ruffer Gold11.6
Oxeye Hedged Income10.67
Blackrock Gold & General10.56
Quilter Precious Metals Equity10.52
GAM Star Alpha Technology9.94

Gold tends to perform well when uncertainty is high as it is a store of value.

It is viewed as a safe haven asset because there is a limited supply of it in the world and this particularly takes effect at times of high inflation, as gold is scarce.

A significant driver of the gold price is the yield on US government debt. US government debt is also viewed as a safe haven, and so effectively competes with gold. 

Gold does not pay an annual income so if the income being paid by US bonds is high, gold is less attractive as a safe haven whereas if the income on US bonds is low, as it is currently, then gold looks relatively more attractive.

Adrian Lowcock, head of personal investing at Willis Owen, was more optimistic about the future of the price of gold.