This commentary from an investment house grapples with recent moves in the gold market and how, in its view, people should view the yellow metal and price developments.

(The following article is updated from an April 22 version. Charts and some figures have been added.) 

As recent price action demonstrates, the yellow metal – famed for its “safe-haven” status – has had something of an image makeover in recent weeks. Prices have risen and while the jury remains out on whether bitcoin will yet attain the qualities of money, gold appears to retain that status. Geopolitical worries (Israel, Iran, the Red Sea, Russia, Ukraine, and Taiwan) and economic ones (inflation has yet to be decisively pushed down in much of the West, and fears about heavy public sector debt) combine to give gold enthusiasts reasons to hold the metal. 

Debate varies on the best way to hold gold, and even whether it is strictly correct to say that it is a zero-yield entity (see this interview here). In the wealth management and private banking space, there are various views on its place in portfolios. 

This commentary from Patrick Kennedy (pictured below), co-founder of AllSource Investments, a US-based firm, sets out reasons for gold’s appeal and where it fits into today’s financial calculus. The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com if you wish to respond.

Patrick Kennedy

Gold has been in a secular bear market for 14 years driven by low inflation, little market volatility, minimal geopolitical conflict amongst the world’s superpowers and a time of unusually low interest rates. Fast forward to today and all those conditions have reversed. Inflation hit a 40-year high. Rates went up by 5X within 18 months causing a regional banking crisis and the worst crash for commercial real estate since 2008.  

Geopolitical tensions are as high as they’ve been since the cold war, with an election year underway and heating up. All of this has driven market volatility with 2022 having been the worst year for a diversified portfolio (stocks/bonds) in 100 years. Central banks also continue to drive demand in gold expected to buy 950 tonnes in 2024 – China leading the pack. With gold being a proven hedge against inflation, a long-term compounder with low correlation to stocks, a strong hedge against geopolitical risk and market volatility, the fundamental case for gold has not looked this solid since the 1970’s.   
 
From a technical perspective, gold also looks very attractive. Typically, when an asset breaks out of a secular bear market and begins a new bull market, the length of the new bull trend tends to be measured in years, not days or months. Look at the S&P 500 for example. Many investors remember the “lost decade” for stocks when the S&P 500 essentially went nowhere for a decade; 2000 to 2010. When stocks finally broke out of that secular bear market, the new bull market lasted well over 10 years. Gold is breaking out of a 14-year secular bear with a strong fundamental backdrop behind it. The charts are also forming what chartists refer to as a cup and handle pattern which tends to be very bullish as it signals a bullish break out.

Previous secular bull markets within gold have been nothing short of impressive. During the 1970s bull market gold compounded at an astonishing 37.55 per cent annualized return totaling a 1835 per cent return throughout the bull market (October 1970 to January 1980). From 1999 to 2011, gold compounded at 17.78 per cent for a total of a 612 per cent cumulative gain which would have made most investors very happy at the time as stocks were flat from 2000 to 2010 with two +40 per cent declines (dot.com bubble and the housing crisis). If the current bull market in gold is at all similar to the previous bull markets we’ve seen in gold, there could be significantly more upside.  
 
 
  
When looking at the current environment, the market seems primed for a pullback. Now pricing in several Fed rate cuts and accelerating earnings' growth throughout the second half of the year, expectations are high with plenty of room for disappointment should anything go wrong with the immaculate soft land scenario. 

With CPI coming in hotter than expected the past three months, there is also now concern that inflation is not completely under control. If volatility spikes, we would expect gold prices to spike as well which could be the match the ignites the next leg higher.  
 
Something to consider when in investing in gold is how one goes about owning the asset. Many investors will get exposure via ETFs which can have expense ratios associated with the ETF itself but also storage cost for the gold it is tracking.  It is also not as clear how much physical gold your own per shares of the ETF you are buying.  We prefer to own physical gold and track at a custodian like Fidelity or Schwab. This allows us to know exactly how much we own at any given point, where the asset is being stored and how we can liquidate it if need be.  

With technical and fundamental indicators aligning for gold in 2024, we stay long and are looking to add to positions.