Source: Zhitong Finance
Gold prices once again hit a record high on Monday, driven by expectations of US interest rate cuts and the appeal of gold as a safe-haven asset. The data showed that spot gold rose 0.3% to $2240.04 an ounce. The US gold futures price once hit a high of $2286.4 and eventually closed up 0.8% to $2257.10 an ounce.
“I think this is an exciting moment for gold,” Joseph Cavatoni, a market strategist at the World Gold Council, said in an interview on Monday. “I think what really drives this trend is that many market speculators are really confident and relieved by the Fed's interest rate cuts.”
Although the price of gold has cumulatively increased by about 38% compared to the previous low in 2022, many market observers are still fond of this asset. Tim Hayes, chief global investment strategist at Ned Davis Research, wrote in a recent report that although the current economic situation is good for the stock market, it seems “more favorable” for gold.
However, some investment experts say that even if the outlook is promising, the role of gold in an investment portfolio should be very different from stocks or bonds.
Since the trend of gold is often different from traditional investments, for some investors, gold may be an appropriate way to diversify their investment, but don't use it as a major component of their investment portfolio. As we all know, billionaire investor Buffett, chairman of Berkshire Hathaway, shunned this asset for a reason.
Why the price of gold has risen and is likely to continue to rise
Different investors hold gold for different reasons. First, this asset is famous for maintaining or increasing value during periods of inflation, although the record in this regard is mixed. On the other hand, if banknotes depreciate drastically, gold is considered a means of preserving value—after all, gold has been considered currency for thousands of years.
In the so-called “safe haven” market, investors tend to flee from riskier assets such as stocks and enter markets considered safe haven assets such as gold and bonds. This means investors tend to buy more gold before and during recessions and bears.
Ford O'Neill, co-portfolio manager at Fidelity Strategic Real Return Fund, said this makes the recent upward trend in gold a bit strange.
He said, “Since October of last year, this has definitely not been (market safe-haven behavior). I think we've experienced what I call a 'rebound for everything, 'and apparently quite a few assets are performing quite well.”
Essentially, he said, the reason why gold is performing well is because investors are pushing up the price of almost everything, from stocks to bonds to cryptocurrencies.
Hayes said that in addition to the upward trend, the weakening dollar and falling interest rates on bonds have also boosted the price of gold. He said that under lower interest rates, bonds and cash accounts “don't have that much competitive advantage” over gold. Hayes added, “We continue to be bullish on gold.”
As the Federal Reserve is expected to start cutting interest rates this year, the outlook for gold is becoming more and more optimistic.
The price of gold is often inversely related to interest rates. As interest rates fall, gold will become more attractive compared to fixed income assets such as bonds. In an environment of low interest rates, bonds have lower returns.
Currently, market observers expect that the Federal Reserve will start cutting interest rates in June.
Data released on Friday showed that the Federal Reserve's key inflation indicator for February rose 2.8% year on year, which may cause the Federal Reserve to wait and see until it starts considering cutting interest rates.
At the end of the recent March meeting, the Federal Reserve maintained its position on interest rates, but still stuck to the expectation that it would cut interest rates three times this year.
Caesar Bryan, portfolio manager at investment management company Gabelli Funds, said that overseas demand is also driving the price of gold higher.
“In China, private investors are attracted to gold,” Bryan said.
Cavatoni of the World Gold Council said that up to now, the rise in gold has been driven by massive purchases of gold by central banks around the world. Due to geopolitical risks, domestic inflation, and the weakening dollar, major central banks are buying gold to diversify their reserve portfolios.
He added, “They have a very good reason to keep buying... (But) let's see if they'll continue to buy at such a large scale and for such a long time.”
According to data from the World Gold Council, China is the main driver of consumer demand and central bank gold purchases.
Gold may just be an appropriate form of diversification
If investors want to add gold assets to their portfolios, the easiest way is to buy an ETF that tracks the price of gold. This allows it to track the performance of gold compared to other portfolios and not have to spend a lot of money to buy physical gold.
But whether you keep it in a brokerage account or hide coins and gold bars in a safe, gold is an asset that doesn't produce anything. That's why the world's most famous long-term investors never touch this type of asset.
In a letter to shareholders in 2011, Buffett stated that at the price of purchasing all gold in the world, one investor can buy all farmland in the US, and the remaining money is enough to buy 16 ExxonMobil (XOM.US) companies. Looking back a century from now, one of these options will bring good harvests and generous dividends. The other is still a huge amount of gold.
Over the past 15 years, ETFs that track the spot price of gold have had an annualized return of 5.5%, while the S&P 500 has an annualized return of 15.3%.
As for inflation, gold's record was mixed. Despite stable inflation since 1988, gold returned negative for 18 calendar years, including 2021 and 2022, when inflation was particularly high.
Some investors prefer to hold a small amount of gold because gold provides peace of mind when other assets fall.
William Bernstein, author of the book “The Four Pillars of Investing,” recently stated in an interview: “When everything else is going downhill, gold is the only thing that is likely to perform well. In the event of a fire, home insurance also has a high return.”
But in the long run, investors are better off holding assets that will grow and reap returns at a compound growth rate.
Buffett wrote in 2011: “Yes, gold has some industrial and decorative uses, but demand for these uses is limited and unable to absorb new production. At the same time, if you have one ounce of gold forever, at the end of the day you will only have one ounce of gold.”
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