Gold hits record high as investors bet on interest rate cuts
- Gold prices reached their highest level on record in Asian trading overnight.
- Prices jumped nearly 2% to $2,111 (around £1,665).
- The price has been boosted by a number of factors, all providing a tailwind at the same time.
- Gold posted strong gains last week, and also rose for a second consecutive month in November.
- Three fund ideas to get gold exposure.
Hal Cook, senior investment analyst, Hargreaves Lansdown:
“The price of Gold has hit a new all-time high of just over $2,100. This is the third time that the $2,000 price has been breached since the middle of 2020. There doesn’t seem to be one specific reason for the recent rally, instead it feels like a combination of factors.
First, real interest rate expectations (interest rates that account for inflation) have come down in recent weeks, following the market view that central banks in the US and UK have hit peak rates. Historically, the Gold price has moved in the opposite direction to real rates.
At the same time, and for broadly the same reason, the US Dollar lost value in November. This makes Gold cheaper for investors using non US Dollar assets to buy Gold and has likely tempted some marginal buyers to invest.
Heightened global geopolitical risk tends to increase demand for Gold and while the potential for the Israel – Hamas conflict to escalate further may have reduced more recently, fundamentally geopolitical risks are higher now than they were six weeks ago.
Finally, a number of central banks have been increasing their Gold holdings. While this has been ongoing for some time, it has likely contributed to this latest rally.
The big question is whether this is a new break out in the Gold price and the rally will continue, or whether the $2,000 figure will act as a technical limit, as it has done twice since mid 2020 (three times if you count the price of around $1,970 in March 2022). The peak earlier today was around the $2,100 mark, with the price as I type back down at $2,030. It’s hard to know for sure, but geopolitical risk and central bank buying are unlikely to go away anytime soon. Real rates and the US Dollar on the other hand are harder to be confident about.
Investing in gold
When the stock market is performing poorly, investors will often use gold to help diversify their portfolios. This is because the price of gold can behave differently to shares.
Gold is a finite resource. You can’t make it in a factory. The relatively fixed supply (it takes time to find and dig up more gold) means that prices are very sensitive to demand. This means that the price of gold doesn’t always move in the same direction as share prices. In fact, quite often it will increase in price when share prices fall. But of course, this isn’t guaranteed.
The reason the price can move in different directions is because when things become uncertain in stock markets, investors sell shares and want to buy something with a value that’s considered ‘safer’. Gold’s a popular choice because it’s recognised globally as something of value. It’s also highly liquid, so you can buy and sell it quickly and cheaply. So, it can be a useful diversifier in a portfolio, particularly during periods of market stress.
But it does come with risks. Prices can sometimes be volatile, affected by things like natural disasters, political tensions, or wider economic events like supply constraints.
3 fund ideas to get gold exposure
Ninety One Global Gold
The Ninety One Global Gold fund aims to deliver growth over the long term by investing in companies around the world involved in gold mining. It also has a small amount, around 10% of the fund, invested in other precious metals, like silver and copper.
The fund is run by industry veteran George Cheveley. He’s been working in the industry for over 30 years and is a specialist in metals and mining. He aims to invest in high-quality companies that are generating strong cashflows and delivering a better return on capital than their peers.
Almost half of the fund is invested in Canada, with the country home to almost half of the world’s publicly listed mining and mineral exploration companies. But the fund also invests globally, from the US and the UK to Australia and South Africa.
The fund is concentrated and has the flexibility to use derivatives, both of which add risk. As this is an offshore fund, you’re not normally entitled to compensation through the UK Financial Services Compensation Scheme.
Troy Trojan
If you want a fund that has some exposure to gold, but as part of a more diversified fund, this could be a good option.
Troy Trojan aims to grow investor’s money steadily over the long run. It tries to limit losses when markets fall, rather than trying to perform strongly at all times.
Gold typically makes up around 10% of the fund and is one their four ‘pillars’ of investment. The managers invest in both physical gold and gold-related investments like companies whose fortunes are strongly linked to the gold price.
While this fund isn’t specifically a gold fund, it does consistently provide meaningful exposure to it. The managers will also change how much they invest in gold based on their level of conviction in the yellow metal compared to other asset classes.
While the fund contains a diverse range of investments, it’s concentrated. This approach means each investment can contribute significantly to overall returns, but it can increase risk. The fund can also invest in smaller companies, which adds risk.
iShares Physical Gold ETC
Finally, investors can use an exchange traded commodity (ETC). These can be a simpler and more convenient way for investors to access specialist areas like gold. These investments are bought and sold the same way as shares and aim to track the performance of the commodity.
Some ETCs invest in the physical commodity, where the manager handles transportation, insurance and storage costs. Others use derivative contracts to artificially replicate the performance of the commodity, without having to own it. This saves on costs, but it’s a higher-risk approach.
The iShares Physical Gold ETC tracks the gold spot price. This is the current price in the marketplace at which a given security, commodity or currency can be bought or sold for immediate delivery.
This ETC only accepts gold that meets the London Bullion Market Association (LBMA) Good Delivery rules. In-line with these rules, the bars also aim to comply with LBMA’s Responsible Sourcing Programme, making sure that 100% of the gold bullion backing the ETC is responsibly sourced.
With an ongoing charge of 0.12%, it’s also competitively priced in the market versus its competitors. Part or all of the annual charge is taken from capital, increasing the potential for your investment’s capital value to be eroded. This fund uses derivatives which can add risk.”
