60 1GM Saturday August 1 2020 | the times
Money
Will the gold price reach
$2,000 — and keep going?
A
s global stock markets grew
jittery over the resurgence
of coronavirus, this week
the gold price climbed to a
record $1,954.
The rise has surprised many inves-
tors who thought that the gold rush
might be over this year, with £262 mil-
lion pulled out of gold funds in June
when it hit $1,783 an ounce.
Perhaps this was down to short-term
profit-taking; in the three months lead-
ing up to June investors had flocked to
the relative safety of the asset, piling
£4.4 billion into gold funds between
March and May, according to the
research company Morningstar.
Investors turn to gold during market
turmoil because it is seen as a safe
haven; it is largely uncorrelated to the
general market and retains its value in
economic turbulence (unlike currency,
which can lose value if central banks
decide to print more money). Goldtherefore acts as an insurance policy
during a financial crisis, and higher
demand means that its price rises.
In March, when the FTSE 100 fell
amid the prospect of lockdown, the
price of gold surged 10 per cent. Inves-
tors put £2.1 billion into gold funds.
Withdrawals in June suggest that some
have since decided to take profits while
prices are high, but gold still continued
its climb, breaking the 2011 record of
$1,920 an ounce last week.
By comparison, the UK stock market
is still down 18 per cent since the start of
the year and £32.7 billion of dividend
payments have been cut or cancelled.
With mounting concerns about a
second wave of Covid-19 in Europe and
the US, analysts think that social
distancing measures could contribute
to gold breaking the $2,000 mark in
weeks, if not days.0 How long can this go on?
The main reason that gold is still a glit-
tering prize is the amount of money
that the central banks are pumping into
the financial system to try to alleviate
the economic impact of coronavirus,
which can weaken the value of paper
currency. The trend for printing money
doesn’t look likely to end any time soon
with the US on the verge of announcing
more stimulus. And it’s not just the UK
and US, but also the European Central
Bank and the Bank of Japan.
If paper currencies are going to lose
value because of greater supply, then
gold seems a safer bet. Adrian Lowcock
from Willis Owen, an investment plat-
form, said that the outlook for the US
dollar looked pretty bleak, which is
good for gold because it is priced in dol-
lars, making it cheaper and more at-
tractive for international buyers.
Ben Yearsley from Shore Financial
Planning said: “Gold is seen as a store of
value if the government finances im-
plode or if inflation rears its head. In
fact, with negative rates in some coun-
tries, it’s actually better to hold gold
than cash or government bonds.”
Normally gold is quite an unproduc-
tive asset — it sits in a vault doing
nothing and doesn’t pay an income or
dividend, unlike a savings account or a
bond. With low and even negative
interest rates now prevalent, the cost of
holding gold is no longer so great.
Unlike stocks or bonds, which can
pay investors dividends or interest and
are largely dependent on the success of
the underlying companies, the value ofgold is dependent on whatever the next
person is willing to pay you for it. On
Tuesday, Bullion Vault, an online
marketplace for physical gold, said that
demand among its users was 190 per
cent above its annual average.
Private banks are now recommend-
ing that their clients allocate 10 per cent
of their portfolio to gold compared with
a maximum of 2 per cent before March.
Adrian Ash from Bullion Vault said
that this suggests that the price will
continue to rise. “While there’s clearly a
risk of gold stumbling on the other side
of this spike, the move upwards has
been less violent than nine years ago,”
he said, pointing out that the price rose
from $1,500 to $1,900 in one month
between July and August 2011.
This is partly because there are fewer
short-term speculative bets being made
on gold, meaning price fluctuations
won’t be as sharp and it might not fall as
violently as it did in 2011. Gold is still a
volatile asset, but the consensus among
experts is that it is going to continue up-
wards, propped up by low interest rates
and rising fears about inflation.0 How much higher could it go?
One way of predicting this is to com-
pare previous peaks in 2011 and 1980.
Adjusted for inflation, gold would need
to rise another 16 per cent in dollar
terms to match its peak of 2011, and
29 per cent to match its peak of 1980, ac-
cording to Bullion Vault.
It took a decade for gold to hit its
previous peak in 2011 and to reach its
high in the 1980s before the price began
a downward trajectory. But it has taken
half that time for gold to climb to its
peak now, and the rally only really
began in mid-2018. Gold tends to move
in long cycles, so there may be more to
come.
“While gold has risen one third from
the lows of March, its value relative to
the stock market has barely moved,”
Ash said. The Dow Jones-gold ratio
indicates that bullion is 40 per cent
undervalued compared with the com-
panies in the index.0 Should you buy or sell?
Gold now looks relatively expensive
and investors are right to be wary about
an asset that has risen almost 10 per
cent in a fortnight. “It is fair to ask
whether after a rally of this magnitude
gold has any value left for investors,”
Lowcock said. However, he said that
because the crisis is far from over itBullion can be a safe
haven during market
uncertainty and the price
has soared. Katherine
Denham says it’s not too
late to get in on the action
With negative
interest rates in
some countries,
it’s better to hold
gold than cash or
government bonds
Investment watch Invesco’s Corporate Bond fund
The wealth manager
AJ Bell has removed
Invesco’s £3.4 billion
Corporate Bond fund from
its best-buy list. Paul Read,
the fund’s manager, said
this week that he was
stepping down from it
and three other Invesco
funds worth a total of
more than £8 billion.
Invesco said that the
move was to bring on
a new generation of
managers and that
Read, who set up the
bond fund with Paul
Causer 25 years ago,
would continue to run
funds at the company.Ryan Hughes from
AJ Bell said: “There are
a few challenges. Key
funds like Corporate
Bond have been seeing
outflows for a long period
while longer-term
performance has tailed
off. The Corporate Bond
fund has returned 22.5 per
cent over five years,
putting it 45th out of the
57 funds in the sector.
“The funds are
synonymous with the
two Pauls and the other
members of the team now
taking a step up are not as
well known to investors.
Also, Invesco’s fixedinterest funds now look
a little expensive
compared to key rivals,
despite a recent fee cut.
While Read stepping
back isn’t a major issue,
given the continuity of
management, all of these
factors add up and as a
result we are removing
the Corporate Bond
fund from our favourite
funds list.”
The performance of the
other giant funds from
which Read is stepping
down has also been
lacklustre. The £2.3 billion
Monthly Income Plus fund
stands 32nd out of 58funds over five years, the
£2 billion Distribution fund
is 95th of the 133 funds in
its sector, while the £611
million Tactical Bond fund
is 37th out of 58.
Darius McDermott from
Fund Calibre, a research
website, said: “Since Read
and Causer formed the
fixed income business at
Perpetual in the mid-
1990s they have become
the “go-to” bond team for
investors thanks to their
long-term track record,
though performance
hasn’t been so good over
the past five years.”
Mark AthertonGoing for gold