Gold has risen above $2,000 for the first time ever as investors seek safe havens in the coronavirus pandemic but fund managers see reasons for the precious metal to rise even further. 
The price of the yellow metal has surged by around 30 per cent over 2020 so far, following rising coronavirus cases, massive amounts of money being pumped into the global economy and renewed tensions between the US and China.
Giles Coghlan, chief currency analyst at HYCM, said: “To me, 2020 will be known as the year of the gold rush. Its spot price has increased by 32 per cent since the beginning of the year. and finally broken $2,000. This an astounding performance, and naturally has people questioning just how high the price of gold will go.”
Gold vs global equities and government bonds in 2020
Source: FE Analytics
Jason Hollands, managing director at Bestinvest, believes that the uncertainty surrounding coronavirus, policymakers’ response to the pandemic and a dire outlook for the global economy means gold is likely to remain popular.
“Gold has once again, and unsurprisingly, performed its traditional role as the investment of choice when panic has gripped the markets this year,” he said
He highlighted four main reasons why gold has risen so much this year: fears of a second coronavirus wave, the prospect of more money printing from central banks, the weakening in the US dollar and low yields reducing the opportunity cost of owning gold.
“Until there is some resolution of these factors, gold is likely to continue to find favour with many investors,” he added. “In our view modest allocation to gold within a diversified portfolio can help improve the overall risk profile and this year it has certainly helped do that job.”
Bestinvest’s preferred gold ETC is the Invesco Physical Gold ETC GBP, which is listed on the London Stock Exchange and replicates the performance of the London Bullion Market Association Gold Price. It has low ongoing costs of 0.19 per cent.
Adrian Lowcock, head of personal investing at Willis Owen, last week said that gold “could easily go through $2,000 this year” – which happened yesterday – on the back of the massive monetary and fiscal stimulus that continues to be launched in response to the pandemic.
“Some investors are also clearly concerned about the long-term impact of the actions of central banks,” he said. “If central banks can just digitally create money out of thin air, then it could easily undermine the fiat money system, potentially devaluing currencies or worse. Gold would look very attractive in that scenario.”
In addition, while investors are more concerned with the risk of deflation rather than inflation at the moment, the vast sums of money being pumped into the global economy could cause inflation to return in the future.
Gold has a long history of protecting against inflation over the longer term, Lowcock noted.
And while some may be concerned that the strong run in gold over 2020 so far could mean that it is too late to buy the precious metal, he argued that the nature of this “once-in-a-lifetime crisis” means the safe-haven trade is likely to continue.
“It is fair to ask whether, after a rally of this magnitude, if gold has any value left for investors. However, this crisis is unfortunately far from over,” he said.
“We are yet to see the full impact on the US economy, or the global one, and more stimulus looks set to come as countries spend vast amounts to keep unemployment down. Against that backdrop, we think gold has further to run as the value of currencies around the world diminishes.”
Performance of fund vs benchmark and gold over 2020
Source: FE Analytics
Lowcock added that investors can access the metal through gold miners as well as direct exposure through ETCs. He likes Blackrock Gold & General, which focuses on well-managed, larger gold miners that have strong balance sheets, as well as having exposure to other precious metals and minerals.
Mobeen Tahir, associate research director at WisdomTree, argued that gold does not need equity markets to crash to continue to rise. Instead, he sees the fact that the metal has moved upwards at the same time as equities in recent months as a sign that it is being used as a put option.
“Following previous meltdowns in equity markets – notably the dotcom crash and the global financial crisis – gold strongly outperformed equities,” he said.
“As equities recover, they – in a manner that seems counterintuitive – move in the same direction as gold. They have indeed done so since March this year.”
Source: WisdomTree
Tahir added that investors with equity exposure might consider using gold as a hedge against four risks:
- Earnings - “Given the rally in equities in Q2, weakness in earnings may disappoint Wall Street”
- Infections - “The continuous rise in daily new cases of Covid-19 infections around the world may take its toll on markets”
- Economic data - “Second quarter gross domestic product data for the US and Europe may serve as a reality check”
- Geopolitics - “Equity markets have largely brushed aside rising tensions between the US and China”
“Aside from frequent, but short-lived wobbles, equities have generally rallied since March on the back of significant monetary stimulus from central banks. This stimulus is unlikely to be withdrawn in the next few months,” he said.
“But equally, the risks noted above are not likely to disappear either. This creates a scenario where both equities and gold could continue to push upwards. Investors may keep adding equity exposure but look to mitigate their downside risk with what appears to be the new put option – gold.”
However, all of this does not mean that holding gold is without risk.
Rupert Thompson, chief investment officer at Kingswood, agreed that gold looks well supported for the time being and could rise further as investors continue to seek safe havens.
This is especially true as ultra-low interest rates means government bonds have limited scope to offer the portfolio protection that they have in the past.
But he finished: “One shouldn’t forget that gold is volatile. If and when we do eventually see a return towards normality, gold could well retreat significantly. After all, the gold price more than doubled in the three years following the global financial crisis, only then to unwind half of those gains over the following couple of years.
“Finally, for UK investors, there is also currency risk associated with investing in gold with part of the latest rise in gold just a function of the recent weakness in the dollar. Gold may be a risk-off asset, but it is a risky one.”