Gold prices have been catching bids this month, climbing from a bottom of US$1,763 an ounce in early November to now trade at US$1,845 an ounce.
The opinion is mixed among commodities exerts on what direction the yellow metal will head next. As is usually the case with this precious metal, there are many players on both sides of the fence.
But, make no mistake, the allure of owning physical gold bullion or even shares in ASX gold miners continues bringing investors to the table.
Let's take a closer look at what the experts have to say about investing in gold.
What's the deal with gold?
The age-old debate for gold is how to invest in it. Legendary hedge fund manager Ray Dalio reckons keeping a 2% weight of gold in one's portfolio is prudent for diversification. Many others also suggest that gold is a staple in any portfolio as an inflation hedge.
Turns out that both angles are mostly correct — but only over the long term. In fact, gold has done pretty well on most fronts over the long term.
When looking at an inflation hedge, experts analyse how an asset correlates or moves with inflation over time.
Research from Reuters shows that over the last 30 years, gold has increased with little-to-no relationship to inflation data. That's important – an inflation hedge should continue growing regardless of whether inflation is high or low.
Secondly, it is necessary to think about how to invest in gold in the first place. There are 3 ways retail investors can gain access. Buying gold bullion involves seeking out a broker and purchasing tangible gold in person, or online. Investors can also purchase shares in gold miners or gold-related companies. Finally, there are exchange traded funds (ETFs) that track the performance of gold and gold miners.
Looking at past returns of gold and its offshoots shows promising results. According to analysis from the ABC Bullion Company and Chant West, gold was the top performer across all Australian listed assets over the past 15 years, compounding 10.6% on average each year in that time.
This result also outpaces the annualised rate of inflation over the same period, according to statistics obtained from the RBA. The benchmark S&P/ASX 200 index (ASX: XJO) has climbed at a compound annual growth rate (CAGR) of less than 4% in that time.
So gold has remained in fashion regardless of the economic environment — over the last 15-25 years at least. Now let's see what the brokers are saying about gold.
What are experts saying about the price of gold?
A note from Goldman Sachs back in July said the broker is bullish on the price of gold. It reckons the metal could reach US$2,000/oz amid fluctuations in US Treasury bonds and a rebound in the global economy.
The firm said gold was pricing a "goldilocks scenario of moderate inflation and continued global recovery". The broker reckons the recent upswing can continue.
Investment commentary on gold has fluctuated from Swiss bank UBS Group AG over the last 2 years. Its sentiment has morphed from "gold as a safe haven asset" in 2019 to urging investors to rethink their gold bullion holdings in the last few months.
Curiously, the bank asked why investors would "hold so much insurance asset" in a "world that looks better" regarding COVID-19.
UBS warns investors that gold may lose popularity amid a strengthening US dollar and the global economy's rapid recovery. It isn't as rosy on the price of gold and says the metal could reach as low as US$1,600 an ounce.
Meantime, Morgan Stanley recently updated its decision guide on investing in gold. The report suggests silver may be a better inflation hedge but that gold is historically less volatile.
It likens gold to an inflation hedge nonetheless and offers a rundown of each investment route. The firm's CIO of wealth management, Lisa Shalett, says that "when the dollar weakens, it may be a good time for investors to consider adding some gold to their portfolios".
Specialist in precious metals at Morgan Stanley, Nicholas Thompson also reckons that "gold bars and coins often trade at a slight premium over the spot price".
The bank also argued investors should get more defensive and focus on quality over growth in their shareholdings in a recent note, citing gold shares and/or bullion as examples.
What's the verdict?
There is ample research supporting the idea that investing in gold is a reasonable hedge against inflation in the long term. Most experts also agree that gold is also a reasonable holding in one's portfolio for growth prospects.
Gold has also performed well in the past 10-15 years and maintained its value against the level of inflation and Australian dollars, that is cash, in that time.
In the short term, the opinion is mixed. UBS reckons gold investors will have a rough time in the next few periods, but Morgan Stanley and Goldman Sachs each are bullish on gold's price direction over the next 12 months.
Nonetheless, the argument is consistent amongst each expert firm — that gold is an investment offering low volatility and a return that could outpace inflation over the long term.
