Gold: To invest, or not to invest?

Gold: To invest, or not to invest?
An employee shows gold bullions at Degussa shop in Singapore June 16, 2017. (Reuters)
Short Url
Updated 24 December 2020

Gold: To invest, or not to invest?

Gold: To invest, or not to invest?
  • Ultimate safe-haven asset had record highs this year 

RIYADH: The coronavirus pandemic has had a brutal impact on the world’s economy, but it hasn’t all been bad news. 

Gold bullion, the world’s go-to commodity in times of crisis, was up around 24 percent this year and is set for its biggest annual gain since 2010.

What is this precious metal’s big attraction? It benefits from diverse sources of demand - as an investment, reserve asset, a luxury commodity and a technology component - according to the World Gold Council. It is highly liquid, nobody’s liability and carries no credit risk. Furthermore it is scarce, historically proving to preserve its value over time.

Gold can enhance any investment portfolio in four key ways. It generates long-term returns, acts as a diversifier and mitigates losses in times of market stress, provides liquidity with no credit risk and, finally, improves overall portfolio performance.

The price of gold hit a record high in August, when it reached $2,075 an ounce. On Thursday, spot gold was up 0.3 percent to $1,877.43 per ounce, while US gold futures were up 0.3 percent to $1,882.90.

“A combination of a weaker dollar, negative real rates and low yields along with uncertainties around the new strain of coronavirus is helping gold at the moment,” UBS analyst Giovanni Staunovo told Reuters.

The question that analysts are asking is if gold, which is the ultimate safe-haven play, can provide investors with a return in 2021.

Mazen Al-Sudairi, head of research at Riyadh-based financial services company Al Rajhi Capital, said that global consumption of gold had “plateaued” at 4,500 tons for the last decade, which accounted for the upward movement of the price of gold since March.

“Gold prices have dropped from August’s record high … as economies are starting to recover,” he told Arab News.

He also said the risks of excess currency printed by central banks across the world could improve the investment case for gold, once the current declining trend in gold prices came to a halt and changed direction.

“Rising inflation and a low interest rate environment would also support gold prices.” 

A report from Barclays Private Bank said that while gold was unlikely to drive long-term growth, it remained a “powerful diversification tool” and was a good way “to preserve wealth during periods of turbulence.”

Vijay Valecha, chief investment officer at Dubai-based Century Financial, said that while gold prices had surged sharply in 2020, at the moment they were still more than 10 percent off the record high seen in August.

“Demand for the safe-haven metal dwindled on hopes of economic recovery following a string of positive vaccine developments. Nonetheless, the long-run fundamentals still favor the bullion as leading central banks continue to offer support for economies.”

He also said that the market’s focus on a return of inflation in 2021 had helped “put a floor” under gold prices, and that the US 10-year inflation break-evens were above their pre-pandemic levels.

“With the Fed signaling near zero interest rates till 2023, inflation should rise at a faster pace than US bond yields, which means the US real-yields are likely to remain well below 0.0 percent. This subdued real rate environment will buoy the attractiveness of gold as an alternative investment to fixed income.” 

He added that vaccine-related optimism, Joe Biden’s election victory, a coronavirus relief package from the US and the Fed’s commitment to maintain its unprecedented accommodative monetary policy stance had all generated expectations for reflation trade in 2021. This pointed to further downside momentum for the dollar, indirectly favoring gold.

Given the extended era of ultra-low interest rates, ongoing weakness in the dollar, swelling-debt-to-GDP ratios, rekindling of inflation pressures and uncertain timeframes for the mass rollout of approved vaccines, Valecha said that dips in the price of gold could be considered buying opportunities.

“However, investors should not expect a repeat rally of this year as the vaccine-led recovery optimism will cap the gains.”

Bitcoin has been the buzzword in the business community over the last few years, and some have speculated it could be touted as the next gold. Cornelia Meyer, a Ph.D.-level economist with 30 years of experience in investment banking and industry, i snot convinced: "For the time being Bitcoin is still too speculative to be a reliable store of value, which gold is. However, this year has seen the first albeit tentative inflow of institutional money into the crypto currency."

Meyer believed that while the rally in gold earlier in the year was fuelled by the pandemic, but there are also otehr factors at play. "It was further aided by the fact that traditional safe assets like OECD government bonds have extremely low or negative yields."