The gold rush raises its price to the heights

Gold does good with bad news and uncertainty.

This year of banking crises, volatility in interest rates, economic slowdown and geopolitical tension with the war in Ukraine in the background, have caused the price of the precious metal to appreciate 10% since January.

The price of an ounce of gold (28.35 grams) is trading at $2,050, very close to the all-time highs of $2,100 that it set in the summer of 2020 when the covid put fear into investors' bodies.

In addition to being a raw material that is used in different industries, gold is a type of investment that does not generate income, but that escapes monetary problems and counterparty risks, which are very common in crisis situations in which a of the parties does not meet the commitments acquired.

It also offers different investment possibilities: from the simple direct purchase, to the entry into ETF funds that replicate its evolution, or through the acquisition of shares on the stock market of mining companies dedicated to its extraction.

Curiously, these companies have starred in a merger process during 2023 in the heat of the rise of the yellow metal.

The world's largest gold producer, Newmont Gold, has submitted a $19.5bn offer for Newcrest, and B2 Gold has completed the acquisition of Sabina Gold &

With the price of gold near all-time highs, experts do not expect any further significant rises unless the financial and economic outlook darkens to blackness.

But there are favorable winds such as the strong demand for the appreciated metal by central banks and investors.

The latest data from the World Gold Council (WGC) on global flows of exchange-traded funds (ETFs) reveal that the tide has finally turned in favor of gold.

For the first time in 12 months, gold ETFs have seen net inflows across all continents in March.

"In our view, the metal is unlikely to lose its appeal as a safe haven asset as long as the global economy remains fragile," said Claudio Wewel, currency strategist at J.

Despite this change in investor trend, gold continues to play an unremarkable role in the world of collective savings: gold ETFs represent approximately 2% of all listed securities in the world.

And central bank demand remains very strong, according to Ned Naylor-Leyland, Gold&Silver fund manager and precious metals expert at Jupiter AM: “Central banks continued to buy gold at a record pace in the first quarter.

The figures for the first months of the year are close to 125 tons, with China and Singapore registering significant increases”.

And they add: "The decision to freeze Russia's foreign exchange reserves seems to have accelerated this trend, as central banks continue to diversify their holdings in the system's neutral reserve asset and gradually reduce their dependence on the US dollar," they conclude.

Some acquisitions that for Wewel represent an "important floor for the price of gold".

Central banks are now estimated to hold approximately $1.3 trillion worth of gold, with purchases at a rate not seen for 50 years.

But this quantitative part in the demand for the precious metal responds to a qualitative strategy of the world of money.

Undoubtedly, the failure of the Silicon Valley Bank and the rescue of Credit Suisse were the trigger for the rise.

“The consequences of these financial fiascos have forced Western investors to reconsider their allocation to monetary metals.

Concern over counterparty risk and systemic contagion have sparked renewed interest in gold,” explains the expert at the Jupiter AM manager.

A vision that he shares with Claudio Wewel for whom gold has normally risen strongly at the beginning of episodes of financial difficulties or high geopolitical uncertainty like the current ones.

The impact of rates

The perspective of gold as a safe haven asset and as a competitor to the less tangible world of money leads it to compare itself with other assets.

Marco Mencini, senior portfolio manager at Plenisfer Investments, comments that rising interest rates have a strong downward influence on gold, an asset that does not generate income flows.

"Today the market imagines the start of a new phase of falling rates and, in this context, the opportunity cost of owning gold decreases, which therefore becomes attractive."

This expectation of lower interest rates in the immediate future also benefits gold, according to Ned Naylor-Leyland.

“Gold and silver are very sensitive to changes in monetary policy and future inflation.

And, as is the case with oil, the price of gold in dollars is highly influenced by the evolution of the US currency.

The dollar has fallen 2% in the year against the euro and its loss of value pushes the price of the precious metal.

This is how Marco Mencini explains it: “The appreciation of the dollar in 2022 penalized the price of gold, which is usually bought in this currency.

In fact, the subsequent depreciation of the dollar supported the recovery of this metal”.

What if there was a recession?

Gold tends to do well during US recessions. But interestingly, shares of gold-related public companies have done even better in those periods.

Even a more moderate stagflation scenario (low growth, high inflation) has also historically been a favorable environment for gold and silver.

James Luke, a specialist commodity manager at Schroders, says that “if we look at returns from six months before the recessions start to six months after the end of the recessions, we can see that gold has returned 28% of average and has outperformed the S&P 500 by 37%.

Gold-related equities have outperformed this figure and generated an average return of 61%, outperforming the S&P 500 by 69%.”

Some statistics on a study of all the recessive periods of the US economy that confirm how what is bad for the economy as a whole and its agents ends up making this metal shine even more.  

Follow all the information on

and

, or in our

Subscribe to continue reading

Read without limits

Keep reading

I'm already a subscriber