The gold price: how high can it go?

Legendary investor Warren Buffett once said: “If Martians could see the way we behave around gold, they would wonder what on earth was going on. We dig it out of the ground, often at great expense, often in a far flung country, and then ship it back to America… where we dig another hole in the ground, and have it placed there under armed guard!”

Gold has been used as a trading medium for thousands of years, largely due to its inert chemical properties and scarce supply. These days, it has little real world application beyond jewellery.. but it is used as a safe-haven asset – albeit one that splits investor opinion. It’s their ‘Marmite’ if you like: people either love it or hate it.

But at times like now, when geopolitical concerns and a global growth slowdown are beginning to put the brakes on the world economy gold can really come into its own.

The value of gold has soared over the past 12 months – up almost 30% – and is now trading at over $1,500 an ounce for the first time in six years*. Most of this increase has been over the summer months, as investors have sought shelter in lower-risk assets.

Could the value of gold rise further?

Central banks around the world are buying gold at an increasing rate: The World Gold Council revealed recently that 374 tonnes of gold were bought by them in the first six months of 2019 ($15.7 billion worth)– the largest ever accumulation of the yellow metal in the first half of a year**.

Shamik Dhar, chief economist at BNY Mellon Investment Management, said recently that gold could break the record high of $1,900 it achieved in 2001 if current levels of market uncertainty continue, with investors using it as a hedge against global recession and potential inflation, in addition to UK investors hedging against sterling.

Ned Naylor-Leyland, manager of Elite Radar fund Merian Gold & Silver, is equally positive. He and assistant manager Chris Mahoney believe that gold “could head towards $2,000 by 2020, as central banks pursue ever more accommodative monetary policy, pushing nominal [interest] rates lower and thus benefiting the gold price.”

They also believe that a continued rally in the gold price could lead to further merger and acquisition among gold mining companies, as balance sheets and share prices of the majors strengthen, enhancing their spending power. Indeed, they point out that consolidation among gold mining companies has already begun with the Barrick Gold-Randgold Resources and Newmont Mining-Goldcorp mergers creating two market giants.

What do non-gold specialists think?

While some investors may cynically argue that gold managers would be positive on their own asset class, their enthusiasm is currently shared by a number of non-gold specialists.

Back in July, Vincent Roper, co manager of Elite Rated TB Wise Investments Multi-Asset Growth fund, gave our sister company, Chelsea Financial Services, five reasons why he thought gold would continue to climb higher. This multi-manager offering holds a couple of gold funds and mining funds in its top ten – including Merian Gold & Silver – representing 11.3%*** of the portfolio between them.

Vincent Ropers said: “Gold is considered a safe harbour for investors amid gathering market storms. Often investors might opt for government bonds over gold, as they carry interest payments. However, as we see global bond yields declining in reflection of a gloomier growth backdrop, gold becomes more attractive on a relative basis.

“Although central bankers have been buying gold at record levels in recent months, it remains very under-owned by private investors and institutions. If there was a further extension in the rally, it is not difficult to envisage short positions beginning to be unwound and the wider market investing more.”

Alastair Mundy, manager of Investec Cautious Managed fund, has 10%*** invested in gold and silver in his portfolio. In his recent podcast, he explained: “We remain concerned about inflation and we also remain concerned about central bank behaviour. We think central bankers are busy patting themselves on the back for saving the world during the global financial crisis and are almost desperate for the next crisis so they can introduce us to their next box of tricks.

“We worry that next box of tricks may prove rather inflationary – that in their eagerness to avoid a recession they could actually create an inflationary boom. So we hold gold and silver really as an insurance policy against central bankers making some suboptimal decisions.”

*As at 11 September 2019
**Source: The World Gold Council, 1 August 2019
***Source: fund factsheet, 31 July 2019