Worried investors turn to gold

In his testimony before Congress in 1912, American financier and investment banker J.P. Morgan stated, “Gold is money. Everything else is credit.” He could not have known more than a century later his eponymous firm would swoop in to rescue from its creditors the troubled US bank First Republic, amid a crisis that has once again raised the profile of gold as a safe haven investment in troubled times.

Concerns over counterparty risk, and systemic contagion, in the fallout from the failures of Silicon Valley Bank and Credit Suisse, have sparked renewed interest in gold, and forced Western investors to reconsider their allocation to the monetary metals. Ned Naylor-Leyland, manager of the Jupiter Gold & Silver fund, points to the World Gold Council’s ETF statistics for March, which showed the first inflow in ten months, for example.

Bank failures combined with continued USA-China geopolitical tensions, and the ongoing war in Ukraine, mean demand for the shiny stuff is growing, and the price is rising. At the start of 2022 gold was £1,347.06 an ounce. On 15th May 2023 it had risen to £1,614.34, an increase of 19%, putting it firmly above the psychologically significant $2,000 an ounce level (gold is typically priced in dollars)*.

“Gold is an increasingly attractive safe haven and diversifier as regional bank problems in the USA, slowing growth in the West and an uncertain recovery in China all contribute to growing economic uncertainty,” says George Cheveley, manager of Ninety One’s Global Gold fund.

Even central banks are getting in on the act. Gold buying hit a new record last year and the first quarter this year continued to be strong. Concerns about US dollar weakness and a desire to diversify holdings away from dollar assets seem to be behind this, George believes, especially after the USA “weaponised” the dollar last year when sanctioning Russia.

Ned has checked the numbers – central banks purchased 125 tonnes in the first two months of 2023, with China and Singapore showing significant increases, he points out.

Gold equities are beginning to reflect favourable underlying factors, he says, with costs for gold producers declining in Q4 2022 after reaching a peak of $1,276/oz in Q3 2022. “Lower costs are a windfall for producers as it increases their operating margins, especially at a time when the dollar gold price has risen by $200/oz since the beginning of the year,” Ned says.

An uptick in M&A activity for gold and silver producers so far this year is another boost for the precious metals sector, as major producers seek to replenish their reserves through acquisition. So far in 2023, the world’s largest gold producer, Newmont Gold, placed a $19.5bn bid for Newcrest, and B2 Gold has completed its acquisition of Sabina Gold & Silver.

Finally, the monetary metals are benefiting from positive multi-year technical chart structures that look set to break out to the upside. “We believe that the longer the gold price stays above $2,000/oz, the more likely that there will be a sustained breakout across the sector,” says Ned.

Gold has always thrived in uncertain times and that’s exactly what we’re living through now. Adding some of the yellow metal, or related companies, to your portfolio can be a valuable diversifier until the dust settles.

In a recent episode of the ‘Investing on the go’ podcast, Jason Pidcock, manager of Jupiter Asian Income, comments on the Newmont bid for Newcrest.

*Source: www.gold.co.uk

_{Photo by Zlaťáky.cz on Unsplash}