The word ‘incongruous’ comes to mind when I try to describe what it was like investing in gold last year.
The yellow metal was one of the few to produce a positive return (1.3 per cent), but this was comfortably below expectations as inflation, rate hikes, falling demand in China and a strong dollar all put pressure on what is often seen as the safe haven asset in an uncertain economic environment.
We are now at an interesting point in markets for the asset class. Having risen around 19 per cent since October, gold is currently around $1,920 (£1,585) an ounce, meaning the asset class is around 5 per cent off its all-time highs, with many analysts predicting strong performance throughout 2023.
There are reasons for that optimism: real rates are likely to have peaked, with any fall likely to bring a higher gold price; the dollar has also started to weaken; while the ongoing war in Ukraine maintains gold as a useful risk-off hedge against inflation.
However, others would point to the changing economic environment, making gold less attractive compared to asset classes.
You are now giving up a lot of yield buying gold versus fixed income. The reality is that the bond market may appear a more attractive alternative to investors at present, particularly with US two-year treasuries well above the 4 per cent mark.
You could also argue that investors will get more upside exposure in other asset classes if rates fall back. As inflation begins to fall, we are also seeing some of the scary scenarios (and possible mistakes) by central banks being taken off the table. It makes for something of a conundrum for investors – particularly over the short term.
Changing your perception of gold
Jupiter Gold & Silver fund manager Ned Naylor-Leyland says one of the big mistakes investors make is comparing gold to currencies – in reality the gold price never changes, but the value of currencies relative to the asset class does. As a result, the price of gold never goes ‘up’, rather certain currencies depreciate at a faster rate against it.
He adds that the rate of this depreciation is not only influenced by the relative strength of the currencies, but also external factors such as gold reserves, jewellery demand and market volatility.
This, in a nutshell, is how central banks view the asset class, which helps understand some of their decisions.
He says: “We have recently seen that central bank purchases of gold are the strongest in the past 25 years. This points towards a fraying of trust towards the safety of traditional currencies. According to the World Gold Council, central banks’ gold purchases have reached 673 tonnes in 2022 alone – the highest level since 1967.”
