Will Gold Shine Bright Even After Inflation Subsides?
Synopsis
The price of gold has surged over the past six months, but with inflation expected to moderate, the support for gold may not continue at its current high prices. Retail investors see gold as a safe haven, while professional investors have calculated reasons to buy. Investors may consider buying shares in mining companies or silver, while being mindful that gold does not pay a yield and can be volatile.
The Surging Price of Gold
Over the past six months, gold prices have been on the rise, reaching close to its all-time high of $2,067/oz in August 2020. Gold has been historically viewed as a safe haven, store of value, and inflation hedge. However, with inflation expected to moderate in the coming months, it raises the question of whether there will be continued support for gold at its current high prices.
The Case for Gold Investment
Gabriella Macari, a chartered wealth manager at Tillit, argues that the case for investing in gold differs between retail and professional investors. While retail investors view gold as a flight to safety, professional investors have more calculated reasons for purchasing it, such as supply constraints, rising demand, and the correlation between gold and the US 10-year Treasury yield. Gold is famously known to be a brilliant hedge against inflation, however investors should be aware that history does not always repeat itself. Macari advises investors to consider other options, such as infrastructure, which has only recently reached the investing mainstream.
Physical Gold vs. Mining Shares
Ian Williams, manager of the Charteris Gold and Precious Metals Fund, believes that the soaring demand for physical gold bullion from Asian central banks makes buying shares in mining companies a more viable investment option. Williams suggests that mining shares are undervalued compared to the current price of gold and represents a massive opportunity for investors. Ned Naylor-Leyland, manager of the Jupiter Gold & Silver Fund, also recommends owning a mix of physical gold and mining shares. Furthermore, both Williams and Naylor-Leyland suggest that silver offers an alternative to gold due to its industrial applications and lower price.
Considering Other Safe Havens
Macari advises investors interested in gold as a haven to be mindful that it does not pay a yield and can be more volatile than expected. She suggests considering other options, such as short-dated government bonds or high-quality corporate bonds that offer a yield.
The Future of Gold Investment
Williams believes that as the gold price clears $2,100/oz, more major gold producers will consolidate in a meaningful way to resolve their growth problems. This consolidation may motivate boards to act sooner rather than later, particularly as they recognize the potential synergies from lowering costs and diversifying operations through acquisition.
The Final Verdict
Investors must weigh their options and determine the best course of action for their portfolio. While gold has historically been viewed as a safe haven and an inflation hedge, investors should be aware that other investment options are available. Mining shares, physical gold, and silver offer viable alternatives to investing in physical gold, while short-dated government bonds or high-quality corporate bonds provide a yield. Ultimately, investors must assess their risk tolerance and investment goals when deciding to invest in gold.
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