Catching the Gold bug

David writes about the rising price of gold. sent to clients on 27th August 2024

Catching the Gold Bug

Dear Max

I hope you have been enjoying the summer weather. With schools out and families away on holiday August should be a quiet month for markets. The recent flash volatility in the Japanese market focussed our minds for a week, but an investor returning from a 3 week vacation and looking at their valuation might be blissfully ignorant of that occurrence. But other indicators hint at the geopolitical uncertainty.

You will have noticed that the Gold price recently hit an all time high, and is still above $2,500 per ounce. A rise of nearly 30% in one year makes it the best performing asset class, even exceeding the S&P 500 index of US equities. A quick check showed that many of our active discretionary portfolio managers hold an allocation to the yellow metal, albeit 1 or 2%; as I know do you and I.

But before we start patting ourselves on the back for some smart tactical asset allocation it is worth asking a few questions. Does it make sense to hold an asset that produces no income ? Gold does not participate in the success of a business nor indeed the success of an economy; although South Africans and Australians may beg to differ.

However, Gold does serve as a monetary refuge for financial institutions during periods of inflation brought on by rate cuts. Conditions that we are experiencing now, so it is perhaps no surprise that investors are relying on this playbook in times of uncertainty.

But this doesn’t explain our desire to buy and own gold. The allure of the yellow metal is surely in our human DNA. It has been coveted by human beings since time began, prized by ancient civilisations such as the incas and the Egyptians. We marvel to this day at the treasures of the Pharaohs and the Mayans.

16th Century Europe witnessed a brutal outbreak of the gold bug plundering the new world for both Gold and Silver. In 1520 The conquistador Hernan Cortes said  “We Spaniards know a sickness of the heart that only gold can cure”. Writing about the same time Sir Thomas More expressed it more eloquently in his book Utopia “They marvel much to hear that gold, in itself so useless, should be everywhere so much sought…”

Perhaps what More should have said is that the intrinsic value of gold, being the discounted value of all expected future cashflows, is zero. That is as true today as it was when he was writing at the height of the European Renaissance. The move over the last 12 months has been extreme but over the last two decades Gold has almost kept pace with the growth of Global equities.

That said, I am sure you will agree that gold remains a useful diversifier of returns in client portfolios during market turbulence and not an asset we should be piling into. Let us remember that the price fell 17% in 2022 so even gold can lose its allure.

David

Chart below: Gold Composite $ / S&P 500 index over 12 months.

source:  Alpha terminal.

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