A golden year

Gold endures. The Lydians reportedly first used gold as money in modern-day Turkey around 700 BC and its psychological place as a store of value persists today. Gold is stable, portable, non-toxic, inert, rare enough and chemically rather uninteresting. As other elements and tradable commodities go, it doesn’t evaporate like oil or die like hogs. Over millennia, societies have attributed an eternal value to gold, exhibited in artefacts the world over. And unlike other precious metals, gold is golden.

Gold has been used as a global currency. The Gold Standard Act in the US was passed in 1900 and established the metal as the only standard for redeeming paper money. Indeed, it was the abandonment of this standard by the UK in 1931 which saw sterling devalue and the country eventually recover its competitiveness after the Great Depression. In 1944, the Bretton Woods Agreement was developed by the UN, with the US dollar seen as a reserve currency linked to the price of gold. President Richard Nixon would ultimately abandon the convertibility of the US dollar to gold in the early 1970s, effectively ending the Bretton Woods system and leading to our current paradigm of mostly floating exchange rates.

As an investment, gold can be tricky to value, not least because it bears no income. As a single stand-alone asset class, it can be volatile – the spot price recently peaked at $2,790 per ounce on 30 October 2024, before falling well below $2,600 per ounce by mid-November, and having been below $2,000 per ounce in February of 2024. Yet at a portfolio level, gold dampens volatility due to its lower correlation with equities compared to other asset classes. Gold therefore helps to smooth returns in a diversified, multi-asset portfolio.

The real yield (the rate of interest received after accounting for inflation) is the main driver for the gold price, and dollar strength is a derivative of this. Recent history shows that there is a significant negative correlation between gold and the US 10–year real Treasury yield. Large gold rallies from 2008-2012 and 2019-2021 can be explained by real yields falling into negative territory.

However, a decoupling happened back in 2022 as geopolitical risks heightened after Russia’s invasion of Ukraine. Since then, gold has continued to rally even when real yields have peaked. This reflects high demand for an alternative currency, and an asset which can act as a store of value, as well as gold being used as a safe haven in times of high volatility. The historical paradigm appears to have broken down and factors other than interest rates appear to be impacting the price of gold.

Furthermore, a limited supply and a significant increase in demand from central banks over recent years has added further support to the price of gold. Emerging markets, mainly the BRICS (Brazil, Russia, India, China, South Africa), are increasing their gold holdings, partly in an effort to diversify away from a US dollar centric financial system. Central banks collectively bought a net 1,135 tonnes of gold in 2022. The Chinese central bank alone purchased 1,037 tonnes of gold in 2023. We expect this momentum to continue in the coming years. 

However, it arguably remains event-hedging and crisis-hedging where gold truly comes into its own. In times of crisis there are fewer opposing ‘bull’ and ‘bear’ views and investors seek refuge in a ‘safe-haven’ asset. This is a key reason as to why the 3-4% positions in our Tactical Select Passive portfolios are physical and not synthetic. If you hold gold as the ultimate disaster mitigation tool, logically your holding must physically exist. We use investment vehicles (which are known as Exchange Traded Commodities), and these track the gold spot price through certificates which are physically backed with allocated gold bullion bars, complete with serial numbers, held in J.P. Morgan’s London vaults and the Royal Mint Vaults in Wales.