One of the main beneficiaries of recent geopolitical tensions, gold has risen sharply in recent weeks. Rebecca Jones asks whether it is set to continue.
Adrian Lowcock, Senior investment manager, Hargreaves Lansdown
There has been a huge amount of negative sentiment surrounding gold this year. I think it was a little overdone but an asset can be out of favour for weeks, months or even years and be undervalued for that period.
The recent price rises have been driven by the paper market because it can sell gold speculatively and move prices quite quickly. Underlying this, the physical market has been driven by India and China. A weakening rupee, particularly, is supporting Indian demand for gold as a safe haven.
Although gold has technically entered a new bull market, we are probably still flat on the year so I wouldn’t say we are in a true bull market. What has happened is that we have had a sell-off and it has stabilised.
Is gold back as a safe haven asset?
Short term, gold will continue to play a defensive role as people get more risk averse but the long term driver – inflation – has yet to come via consistently strong growth in Western markets. If growth continues as it is, that could change very quickly.
We are witnessing the world’s largest monetary experiment. Central banks are printing colossal sums of money and it is hard to see how inflation will stay under control once that starts properly feeding into the system. As an investor, you buy gold as a hedge against that.
However, gold is one of those assets that is only worth what people think it is. It doesn’t have a huge utility or generate an income, so the value comes from markets. At the moment, there is a physical market in India and China where people really value possessing gold.
Clive Hale, Partner, Albemarle Street
Historically, investment banks have tended to keep a dampener on the gold price by having short positions. JPMorgan recently announced it wanted out of the metals market. While it is not exactly clear why, it certainly has problems delivering physical gold to clients as it has had to borrow from other bullion banks.
In the paper market, many say they have authorised gold but it is very circumspect. The Americans will not allow an audit at Fort Knox and, when the Germans asked for part of their gold back from the Fed last year, it said it would have to save it up over seven years.
Since that announcement, gold has been knocked down and down. The feeling is that perhaps the physical gold is not actually there and central banks will keep the price back in order to get more on board.
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