Investors are rushing to buy gold with the price hitting a six-year high as global economic and political anxiety rises, and analysts say it could continue to dazzle in the troubled months ahead.
The US-China trade war, pro-democracy protests in Hong Kong, Brexit no-deal fears and a run on the Argentinian peso have fuelled the latest jump to about $1,520 an ounce. That is a rise of 18 per cent from $1,287 three months ago. Inflows into bullion-backed exchange-traded funds topped 100 tonnes in August to hit the highest since February 2013, according to Bloomberg data.
The speed at which panic-stricken investors are buying gold is similar to the financial crisis in 2007/08, after the collapse of British bank Northern Rock and Lehman Brothers in the US.
As the world’s oldest store of value, gold traditionally swings into favour when investors lose faith in stock markets and paper currencies.
Demand also grows when interest rates start falling as this reduces the return on rival safe havens such as cash and government bonds. But should you be wary of buying at today’s higher price?
Josh Saul, chief of London-based gold investment firm The Pure Gold Company, is hiring more staff to deal with an astonishing 632 per cent increase in physical gold bar and coin sales in the final days of August, usually a quiet month of the year. “The speed at which panic-stricken investors are buying gold is similar to the financial crisis in 2007/08, after the collapse of British bank Northern Rock and Lehman Brothers in the US.”
Mr Saul says financial professionals such as bankers, hedge fund managers and financial advisers are joining the gold rush. “They believe a crash is inevitable and will significantly affect global equities and property, while a US recession may be looming.”
Savers also fear banks will start charging savers to hold their money, as interest rates turn negative. “This has already happened in Denmark and Switzerland,” says Mr Saul.
He adds that these are not traders looking to make a short profit: “They want the safety and security of a physical asset class that sits outside the banking system, and has a proven track record of increasing in value while others are falling.”
Steen Jakobsen, chief economist and chief investment officer of Saxo Bank, is also bullish, citing the lack of attractive rival investments. “It is now one of the few asset classes that I’m overweight in,” he says.
The fact that gold does not pay any interest is normally seen as a drawback, but that is one of its attractions now that a quarter of the global bond market, $15 trillion in total, is paying negative rates. “These days, something offering zero yield almost looks like a good deal,” Mr Jakobsen says.
The US Federal Reserve cut interest rates by 0.25 per cent in July, and like most analysts he anticipates further cuts this year.
A stock market crash is also likely, possibly by as much as 25 per cent, and Mr Jakobsen says gold is “just about the only choice” for those sceptical about stocks and bonds. “It remains cheap as the price is only just starting to move.”
Arun Leslie John, chief market analyst at Century Financial, is another gold bull, citing the recent inversion of the yield curve as a sign of economic trouble ahead.
The yield curve inverts when the interest rate on long-term US government bonds, or Treasuries, falls below the yield on short-dated bonds — normally you would expect a higher interest rate to compensate for the risk of investing over a longer period.
An inverted US yield curve suggests growth is weakening and is a classic signal of a looming recession, signalling every downturn in the past 50 years.
Central banks in 30 different countries have cut interest rates this year, to pin down their currencies and shield their economies and Mr Leslie John says: “This benefits gold as it reduces the opportunity cost of holding the non-yielding metal. Any dip in the gold price can be viewed as a buying opportunity.”
Source – The National.