Naylor-Leyland says the reasons for these significant purchases are two-fold. Firstly, because market/geopolitical uncertainty has led them to increase stockpiles of gold – reaffirming its position in periods of political uncertainty – and secondly, because it remains a long-term hedge against inflation.
Ninety One Global Gold fund manager George Cheveley says investors should take note of the fact that the 50-year-plus high in central bank purchases includes the Chinese, which have started reporting increases in the gold reserves for the first time since 2019.
He sees this as a desire by central banks to diversify away from USD/USD treasuries, in particular by China as US sentiment has worsened towards them.
Gold has proven its recession resilience
The inverted US yield curve continues to stand out as the main pointer to a recession for the global economy (it has been correct every time for the past six decades). So how will gold and gold equities manage should this continue?
Research from Schroders shows that in the past seven recessions gold and gold equities have done well in absolute terms overall (up 28 per cent and 61 per cent respectively) and relatively to the S&P 500 (up 37 per cent and 69 per cent respectively). The only occasion the asset class fell was during the Volcker recession of 1981 and 1990.
Schroders says one of the reasons they are structurally positive on gold is that they believe, given extremely high sovereign debt levels and large deficits, any repeat of a Volcker style intervention would quite likely lead to systemic financial collapse.
Positives for gold equities too
Last year was also difficult for gold equities as gold producer margins got squeezed between rising costs (oil, steel, labour) and falling gold prices. The 5 per cent rise in the gold price year-to-date (as markets look to predict a move down in rate hikes in tandem with dollar weakness) has also begun to benefit gold equities, which are leveraged to the gold price and have risen 13 per cent as a result.
Cheveley says lower energy prices in recent months should help cost control at companies as well, with margins improving from lower costs and higher prices. He says the underperformance of gold equities in 2022 means the lessening of any headwinds should provide a meaningful bounce.
You have to look at gold from both a short and long-term perspective in the current environment. The wider expectation is that, at some stage, the US will reverse their policy of rate hikes as inflation falls back – creating a more attractive environment for the asset class.
Corporate earnings downgrades in many sectors may also drive volatility and push investors towards gold as a safe haven.
