Pure Gold does not tarnish – look through the recent weakness

Summary:  Gold is a classic thematic investment, it is more than just a defensive play or store of wealth, it is an active investment in the face of inflationary pressures and macro and political uncertainty.


The recent weakness in the Gold spot price has caught my eye. For a significant period Saxo have been highlighting the potential qualities and strengths of an investment in Gold. There is a clear argument that most portfolios should have a position in this versatile and multi-faceted commodity. It is more than just a defensive play or store of wealth, it is an active investment in the face of significant inflationary pressures and macro and political uncertainty. It is a hedge against Central Bank monetisation of the market. I would discourage the view that an investment in Gold at this time is consensus and late. Now is not the time to overthink what is a classic thematic investment. The key is to remember the direction of travel and this is a road with significant mileage to cover. The pull back from a spot price of $2074 to the current price of $1870 has taken some of the froth or excess demand out of the spot price. Gold like other assets is not immune to surges and volatility.

Our Chief Investment Officer, Steen Jakobsen, and Ole Hansen, Head of Commodity Strategy, have been sprinkling nuggets or ideas in support of an investment in Gold throughout their strategy pieces. A bit like a modern day Hansel and Gretel, providing a path to the returns and qualities that Gold should bring investors. In early August Steen wrote – The global narrative is that the Fed will stay put through 2022 – leaving “free money” on the table. This is now supported by the incoming fiscal spending which will be north of $1.5 trillion when the deal is reached, taking the deficit to a magical 27% of GDP! 

This brings into focus the gargantuan liquidity that is being poured into the financial markets.  We should expect inflation and further asset bubbles as two of the natural consequences. Commodity followers will be watching the close correlation between Gold’s recent performance and the move in US 10 year yields. The next move will be partly powered by this inflationary pressure while the Fed tries to keep nominal yields low. Demand will also come from the global pension funds and asset managers who own large swathes of bonds at near zero interest rates which offer no protection against inflation. The key is to get positioned in the right assets and then hold your nerve.  It is also fair to remind ourselves that it is probably not a coincidence that the Central Banks, who are by definition very close to the fiscal hubs are buying Gold in record quantities. It is often wise to keep an eye on what the people with much of the data and insights are investing in.

We continue to see good interest in Gold amongst our clients. Ways to play this theme could include:

  • GLD – An ETF that seeks to track the performance of the price of gold bullion
  • XAUUSD – The spot price of gold bullion valued against the USD
  • IGLN – An ETC that seeks to track the day to day movement of the price of gold   
  • GDX – An ETF that tracks the performance of the NYSE Arca Gold Miners index by investing in gold mining stocks across the globe

You can follow Steen and Ole on Twitter or via our Insights pages.

 

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