‘This is the sort of environment in which gold tends to flourish’ – Is now the time to invest in gold?

Following the news in early August that the price of gold per ounce surpassed the $2000 (£1600) mark for the first time in history; should you be looking to invest in the precious metal?

As the world continues to react to the devastating and continued impact of the COVID-19 pandemic, investors, entrepreneurs and high net worth individuals have turned to gold to secure their wealth through these difficult times.

Investors have looked for safe havens during the coronavirus crisis and rising global tensions – driven by the current US/China troubles – and as a result gold bullion has soared in value by more than a third so far this year alone. It has also been one of the most sought after high-value items by investors across the world.

Due to its almost ever-present value for investors, it has received increased attraction due to very low interest rates and widespread stimulus measures by global central banks, as a result of the pandemic.

Why has the price risen?

With global markets and political relations in a perpetual state of turmoil, there have been many indirect consequences of the situation on leading nations and their high net worth investors and entrepreneurs.

As a result, many have turned to gold – so, is now the time to invest?

Rob Morgan, Pensions & Investments Analyst, Charles Stanley Direct said: “To stave off economic crisis during the COVID-19 pandemic the world’s Central Banks, led by the US Federal Reserve and the European Central Bank, have created vast sums of money, propping up businesses and individuals while the worst of the pandemic passes. This ‘monetary loosening’, the swelling of central bank balance sheets, and the spike in government spending have given investors reason to distrust paper currencies more than usual.

“The suspicion is growing that Central Banks will willingly keep interest rates low, while allowing inflation to run above target, to help the economy recover and to gradually reduce their debt burden. In other words, interest rates after inflation are expected to remain exceptionally low, even negative, for some time. This is the sort of environment in which gold tends to flourish.”

“Not only can gold be trusted to retain its spending power over time, compared to paper currencies, but the lack of interest on cash or government bonds means the ‘opportunity cost’ of holding gold (which pays no income and incurs costs to store safely) is lower versus these traditional safe havens. This is why we are seeing a migration from low yielding cash and bonds to gold as the ultimate long-term store of value. Gold also tends to have an inverse relationship with the US Dollar, which has been quite weak recently.”

All these factors have played into investors hands in recent weeks, and with a strong history of retaining its value, the price per ounce has proven to be a valuable ‘wealth insurance’.

Rob Halliday-Stein, CEO of gold.co.uk/Jewellery Quarter Bullion Limited comments: “Gold is best known for its historically proven form of wealth insurance. The current challenges facing the global economy, as a result of COVID-19, are unprecedented in their breadth and depth. Gold prices are currently at record highs in every currency as governments around the world are running huge deficits and resorting to quantitative easing (money printing) in an attempt to lessen the economic shock.

“Gold is currently relatively high as more and more people across the world are beginning to feel that the worst is yet to come and therefore the demand for wealth insurance is at record levels.”

What should investors be aware of?

Now that the price per ounce of gold has hit the £2,000 mark, investors will be trying to predict the best time to invest or sell their prized assets – including gold. But before that, there are several factors they need to consider.

Morgan explains: “Gold has a had a great run but remains below its inflation-adjusted peak in 1980 – equating to around $2,200 in today’s terms – but given the current supportive environment, it wouldn’t be a surprise if the price tested this level too.

“However, investors should be aware that a change in expectations, particularly towards a stronger economic environment and higher interest rates, could cause the price to drop quickly.

“Although gold can be a great diversifier in a portfolio, as it tends to do its own thing and isn’t correlated to other investments such as shares or bonds, it does also come with several disadvantages. It has little practical use owing to its high cost and it yields no income. During ‘normal’ economic times it can become deadweight in a portfolio, or worse because it can be unpredictable and potentially volatile due to geopolitical events or supply and demand imbalances.

“So, although gold is often said to be a ‘safe haven’ asset, in terms of short and medium-term ups and downs it can be anything but. That’s why investors generally limit exposure to a sensible amount such as 5% of a broad investment portfolio.”

Precious metals

After the value of gold rose above the $2,000 mark for the first time in history, silver prices have also jumped 3.2% to $26.84 per ounce. This is the highest the precious metal has been since April 2013. The value of silver has now risen 50% during 2020 – which has meant that it is outperforming the rising price gold in the same time period.

Halliday-Stein comments: “Silver has performed even stronger than gold over recent months, but is still trading at a 75:1 ratio, which means you get 75 times more silver than gold per pound invested. The long-term average is 60:1, which would imply that silver is still relatively cheap compared to gold.

“Silver has the disadvantage that it is subject to VAT if you take physical delivery, whereas gold is VAT-free in the UK and EU. You can still invest in silver VAT-free by opting to store it in a country like Switzerland, and the VAT would only become payable if you choose to take physical delivery in the UK.”

Another precious metal that has received a lot of attention during the COVID-19 pandemic is platinum.

Halliday-Stein continues: “Platinum also looks very interesting at the moment, as it is less than half the price of gold, when historically it has been more expensive. Platinum prices are subdued because it is widely used in the automotive sector in catalytic convertors. However, if global investors decide to move into platinum, prices could rise quickly.”

This relation to practical uses for precious metals, rather than just wealth insurance is also something that investors should be considering at this time.

Morgan comments: “Other precious metals such as silver and platinum are ‘hybrid’ in nature, in that they have significant practical use, as well as being seen as a store of value. This means they tend to be influenced by industrial trends, as well as the many drivers of the gold price such as interest rates and safe haven status. Therefore, gold is preferable for diversification purposes and for exposure to the trend of monetary loosening and ultra-low interest rates.”

What does the future hold?

With gold, silver and previous metals being a hot topic amongst investors and news outlets across the world, many will be looking at the future – regardless if they have made an investment or not.

Carsten Menke, Head Next Generation Research at Julius Baer comments: “A thunderstorm is rolling in the gold and silver markets, showing that the market mood had become excessively bullish as of late. The sell-off will attract bargain hunters, but we remain reluctant to re-enter the markets as we expect prices to move lower rather than higher in the medium to longer term.

“The mood in the gold and silver markets has heated up a lot as of late, further fueling the recent rally and pushing prices higher and higher. Now it looks like trend followers and technical traders have turned up the heat too much. Following a mix of positive economic and pandemic news, this has pushed gold and silver prices down.

“We feel confirmed in our assessment that the insurance gold provides to an investor’s portfolio had become very expensive and that both gold and silver are, for now, more suitable for short-term traders than safe-haven seekers.”