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Gold prices – what do record highs mean for investors?

The primary role that gold has traditionally played in investment portfolios is as a port in a storm in times of financial uncertainty or stress. Industry commentator Jason Hollands explains the main drivers behind the spike in gold prices and gives insights for those considering investing in gold.

Published on 08 Dec 20236 minute read

Written by Jason Hollands

Gold is an asset class we typically have some exposure to in our managed portfolios, viewing it primarily as a de facto insurance policy that can help out in times of market stress. From an investment perspective, gold is widely regarded as a long term ‘store of value’ because it is a physical asset, the supply of which is hard to manipulate.

This is in stark contrast to modern currencies, the amount of which is in circulation can be increased (or decreased) by central banks through Quantitative Easing or Quantitative Tightening.

This wasn’t always the case as currencies such as the US Dollar and Pound used to have a physical tie to the price of gold – known as the Gold Standard – but this was abandoned by Britain in 1931 and the Dollar ended its convertibility into gold in 1971.

However, the most recent spike in gold prices is less a sign of panic because it has taken place at a time when equities have also been rallying hard.

Go deeper – learn more about the allure of gold including the four main benefits of investing in gold and five pitfalls to watch out for with our six-minute explainer, Investing in gold.

Drivers affecting the price of gold  

The main driver behind the latest rise in gold prices has been an outbreak of optimism that US interest rates have now peaked, and rate cuts are coming next year (despite the message from central banks that rates might stay “higher for longer”).

This wave of hope in rate cuts has also seen the yields on US Treasuries (bonds issued by the US government) fall sharply in recent weeks and an impressive equity rally too which has seen the S&P 500 Index surge by over 9%1 since the end of October.

Go deeper Mining returns in gold unpacks the factors that may drive the gold price higher in both the short- and long-term.

Why did gold prices rise as yields fell in bond markets?

Falling yields on government bonds, especially US Treasuries, are a positive for gold. That’s because a bar of gold does not generate any income and so there is an opportunity cost to holding gold when yields are attractive on other ‘safe haven’ assets like US Treasuries. So, lower Treasury yields are more supportive for gold.

With expectations growing that the US has come to the end of its rate hiking cycle, the US Dollar has begun to weaken against other major currencies. The knock-on effect for gold from a weakening Dollar is also positive because gold is priced in Dollars.

When the Dollar is strong, demand for gold is affected because it hurts affordability for buyers in non-Dollar currencies (and vice versa).

One of the biggest factors behind the recent strength of gold over the last couple of years though has been buying by emerging market central banks and sovereign wealth funds, including China.

Their motivation is likely to have been influenced by western sanctions against Russia which have included freezing Russia’s foreign currency reserves held overseas. Physical gold held in domestic vaults is much harder for foreign powers to move against.

How ordinary investors can invest in gold – including within ISAs and pensions

For private investors, there are several ways to invest in gold. One way is to physically purchase gold items, either to be stored at home or to be held in a secure vault, like the Royal Mint, for a fee. Certain gold bullion coin products issued by the Royal Mint have the status of legal tender currencies and are therefore exempt from UK capital gains tax (as well as VAT).    

But for investors who might want to buy and sell gold within ISAs and pensions at the click of a mouse, the two routes are indirect investment through funds that invest in the shares of gold mining companies, or in physical gold through exchange traded commodities (ETCs).

Gold mining shares are notoriously volatile and not for the faint-hearted. That’s because mining is a costly business, and therefore even modest movements in gold prices can lead to big swings between profits and losses. Specialist funds that invest in gold mining equities include BlackRock Gold & General and the Jupiter Gold & Silver funds.

A less erratic approach is to invest in physical bullion via an exchange traded commodity (ETCs) which is our current strategy.

These are shares, listed on the London Stock Exchange, that provide investors with exposure to the gold price, backed-up by physical holdings of gold bars held in secure vaults. Examples of Exchange Traded Commodities that track gold bullion prices are Wisdom Tree Core Physical Gold and Invesco Physical Gold ETC GBX. The latter fund is on The Best™ Funds List and has low annual costs of 0.12% and is backed by gold bars, securely stored in the London vaults of JP Morgan Chase Bank.

If you’d like to find out how investing in gold could work for your portfolio, you can arrange free coaching with a qualified financial planner and get an expert portfolio review whenever suits you. It’s easy to book yourself in and there’s no ongoing commitment.

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1 Refinitiv Lipper, total return basis in USD, from 31 October 2023 – 30 November 2023

The Best™ Funds List is a trademark of Bestinvest

Important Information

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

The value of investments, and the income from them, may go down as well as up and investors may not get back the amount originally invested.

Prevailing tax rates and reliefs depend on individual circumstances and are subject to change. ISA rules can also change.

Funds which invest in specific sectors may carry more risk than those spread across a number of different sectors.  Gold and other focused funds can suffer as the underlying stocks can be more volatile and less liquid.

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