David Jane
Premier Miton Macro Thematic Multi Asset Team
Are too many people ignoring gold?
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Gold had a good year in 2022 relative to other asset classes, particularly in sterling terms. Ultimately when priced in dollars its annual performance for 2022 was flat. Clearly it worked as a store of value, but as an inflation hedge it was arguably disappointing. This week we look at the drivers of the gold price, short and long term, and assess its role in portfolios going forward.
Gold price rebased to 100 in US dollar and Sterling terms
Source: Bloomberg data from 31/12/2021 to 30/12/2022. Past performance is not a reliable indicator of future returns.
A country-less currency
The clearest near-term relationship for gold is to real interest rates. Consider gold as a currency (without a country), that does not pay any interest but maintains its real value over time. Hence, the more other currencies compensate you as an investor, the less inclined to hold gold you might be. Last year as inflation surprised to the upside, gold was very strong but once central banks, particularly the US, started to aggressively raise short term interest rates, the attraction of gold reduced.
In the long term, gold is an inflation hedge in that it can hold its value over the very long term in real terms. However, in the short term it can diverge greatly. This makes it a inefficient as a means of protecting portfolios against inflation when used in isolation.
Unfortunately, the conclusion from this is that gold, like everything else, is at the mercy of inflation and the US Feds rate hiking cycle. From a portfolio point of view, that makes it potentially attractive, particularly as a sterling-based investor. If the US continues down the tightening path and successfully gets inflation under control, sterling may weaken and therefore, gold in sterling terms may perform well.
We think it more likely the Fed pauses too early and inflation remains higher for longer, with real rates still too low. If that occurs, then Gold may perform well in dollar terms and its performance in sterling will be a function of how successful the UK is at getting its own inflation under control. We doubt the UK can decouple from the US given it has worse structural inflation issues.
Gold – always believe?
We think therefore the near-term outlook for gold remains favourable, relative to many other asset classes to a UK based investor.
From a portfolio management perspective, gold, like other real assets, may play an increasing role in coming years. We have a material investment position in gold and other commodities. With global government debt now at unprecedented levels, the only practical way of reducing it is inflation and negative real interest rates. In such an environment gold and other commodities may be amongst the more attractive asset classes, even though many multi asset managers do not even consider them currently.
