Is gold a good place for investors to hide?
Low interest rates, volatile stock markets, ongoing US-China trade uncertainty and UK's looming Brexit election are a few reasons investors may be leaning toward gold as a safe-haven asset.
Low interest rates, volatile stock markets, ongoing US-China trade uncertainty and UK's looming Brexit election are a few reasons investors may be leaning toward gold as a safe-haven asset.
Australian interest rates were held at a record low of 0.75 per cent on Tuesday by the Reserve Bank of Australia, in its final meeting on interest rates this year.
RBA governor Philip Lowe highlighted the central bank continued to monitor weak consumer spending, stagnant wage growth and the lacklustre prospects for the latest set of GDP figures, due on Wednesday.
Low interest rates are also a feature of the US market. The general view is that the US Federal Reserve is done cutting interest rates, having cut them three times this year.
This is a view shared by Kristoffer Inton, a Morningstar US-based equity research director focusing on basic materials.
Gold prices peaked at US$1550 an ounce in September this year, ticking up US$200 in just a couple of months on the back of rising demand. Since then, the price has pulled back slightly to around US$1,450 an ounce – but still sits around US$150 above Morningstar's mid-range forecast of US$1300 an ounce.
But Inton also notes that current interest rate options imply a roughly 70 per cent chance of rate hikes in 2020.
"All else equal, the change in the Fed policy has restored the attractiveness of investment demand for gold, a sharp turn from the trend during the last few years," Inton says.
He also highlights the gap in yields between 10-year US Treasury bills and the federal funds rate, which is nearly zero. This further increases the appeal of holding gold.
"As such, gold ETFs have seen strong inflows in recent months, as the FOMC’s return to rate cuts have led to gold’s return to popularity."
US, China industrial activity
Weak manufacturing data out of the US, which this week rekindled concerns about a slowing economy, has also helped bolster gold prices.
Gold initially fell overnight after manufacturing data from China was stronger than expected, which helped equity markets. But stock prices, credit yields and the US dollar have since fallen back again, which supported gold prices.
Ryan McKay, a commodity strategist at TD Securities, agrees with the broadly held belief that the Fed will leave rates on hold for now.
"We'll need to see a trend in weaker data through early 2020 to convince the market that we're going to get more cuts. Until then, there's no real impetus to see gold rally," McKay says.
There US Federal Reserve is due to meet once more in the remainder of 2019, on 10 December, but most market watchers expect the Fed to leave rates on hold until mid-2020.
Gold bugs should tread carefully
But investors considering investing in gold should proceed with caution.
"Gold on its own looks unappealing for the sensible investor; it pays no yield after all. And the only way to make a return on gold is if its price rises," says Schroders multi-asset fund manager Sivarishi Sivakumar.
But when yields on bonds turned negative in the US earlier this year – interest rates on short-term bonds were higher than those on long-term bonds – he noted even the zero yield on gold made it attractive to investors looking for safety.
Morningstar Investment Management's chief investment officer for Europe, Middle East and Africa, Dan Kemp, views investing in gold as controversial. This is because a decision to buy gold is often driven by fear of an economic crisis or short-term changes driven by politics or market movements.As such, he's sceptical about the long-term value of gold to investors.
"As these commodities have no intrinsic value, returns are governed by the balance of demand and supply together with the degree of speculation present in the market," he says.
"These factors are all extremely difficult to predict and as a consequence, investment in this area has a low probability of success."
Kemp highlights that rather than engaging in speculation, Morningstar focuses on fundamentals – which means its analysis is purely valuation-driven.
"This means our analysis of the commodity cycle is purely valuation-driven and leads to a preference for assets that are undervalued relative to a conservative estimate of the cash flow they generate.