Having reached an all-time high at the start of December, briefly surpassing $2,100, Eric Strand, manager of the AuAG ESG Gold Mining ETF, recently forecast the price of gold will close the year with at least at 20% increase in price, in dollar terms.

“We believe that central banks will shift away from rate hikes and adopt a more accommodative policy stance in 2024, which will catalyse a substantial upswing in gold prices for the foreseeable future,” he said.

For James Penny, chief investment at TAM Asset Management, the recent strength of gold in both rising and falling markets has bolstered the credentials of the metal as a “true-blue” alternative for investors’ portfolios at a time when many are searching for just that.

“Gold certainly is an interesting investment in current market conditions,” he said. “In a world where rates and real yields are rising and bond investors are finally getting an income again, one can see this as an environment where a zero-yielding asset like gold suffers.”

Indeed in the rally of November in which bond and equities rose, Penny said the fact that gold also hit an all-time high would suggest the yellow metal not only remained resilient against rising interest rates, but also benefitted from them coming back down again, giving the asset class a “nice convexity”.

“Whilst there could be some short-term weakness in gold as investors potentially take a step back from the strength, we see continued stability from the metal; as real yields continue to look high and set for a more sustained lower to the benefit of this zero yielding asset,” he added.

David Coombs, head of multi-asset investment at Rathbones, sees the use of gold as tactical rather than strategic and despite the forecasts of jumps in the price of gold explained his fund’s gold positions remain very modest.

“As is well known, not having an income stream means valuing the metal can be an art rather than a science,” he said. “I think it is important to acknowledge that, rather than to try and post-rationalise its price movements.”

For Coombs there are two scenarios in which gold is attractive, the first, and he said most obvious, is stagflation.

“The problem is you need this to be a concern across most developed markets and in particular the US for this to impact the price positively,” he said. “But it is the dollar that is working not gold and you would be better off in US treasuries and cutting the coupon.”

He added: “The second scenario is a weak US dollar, either caused by falling interest rates (and therefore a falling opportunity cost) or a lack of demand for US assets. During these periods it is best for a sterling investor to buy gold and hedge the dollar.”

However Coombs said at any other time gold is an insufficient store of capital and that right now, government bonds are “potentially a better diversifier” to equities given the risks of a global recession and the fact investors are being paid 4-5% even if the recession is averted.

“This is why our gold positions are very modest and we have been actively adding duration,” he said.

James Sullivan, head of partnerships at Tyndall Investment Management, said the decision to hold gold simply comes down to investor risk appetite and mandate.

“When I observe that a FTSE 100 benchmarked fund manager has 6% in Shell versus the stock’s index weighting which is greater than 8%, I assume in peculiar fashion they are wanting that position to fall in value, so they outperform in relative terms,” he said. “This is something that has always interested and bewildered me in equal fashion.

“Holding gold is not too dissimilar,” he added. “Essentially an allocation to gold means less capital deployed elsewhere, potentially into equity markets. It is essentially a bet against markets going higher, and more some form of insurance against broader macro events, which are notoriously hard to predict.”

He added: “The opportunity cost of holding an asset with no earnings or yield is not to be overlooked in a fast-moving, upwardly mobile market, yet I am sympathetic to those who, on occasion, need something of a comfort blanket to help them sleep better.”

Tensions in the Middle East and North Africa have led oil prices to approach $79 a barrel for Brent Crude and around $73 for West Texas Intermediate, which Green warned will have broader economic implications on individual sectors within investor’s portfolios.

“Global investors need to take seriously the volatility in oil prices due to their direct influence on inflation, as rising oil prices can lead to increased production costs across various industries, affecting corporate profitability and economic growth,” Green said.

“Additionally, oil price fluctuations can create market volatility, influencing the performance of energy-related stocks and sectors, making it crucial for investors to monitor and perhaps adjust their portfolios in response to these changes,” he added.

Given that tensions in the Middle East introduce geopolitical risks that can significantly impact market sentiment, Green said investors often respond by reassessing risk tolerance and adjusting asset allocations.

“Safe haven assets, such as gold and government bonds, could experience increased demand as investors seek refuge from market volatility,” he said.

In terms of equity exposure, Green noted currency fluctuations and emerging market vulnerabilities will also be in sharp focus.

“Rising oil prices can contribute to currency fluctuations, particularly affecting economies heavily dependent on oil exports,” he said.

“For investors with exposure to emerging markets, currency devaluations may pose risks to their portfolios,” he added. “Countries with large external debt denominated in foreign currencies may face challenges servicing their debt obligations, potentially impacting the performance of assets tied to these economies.”

Investors used a variety of methods to enter the precious metal market, with 77% using either the Mint’s digital platform, DigiGold, or purchasing fractional coins and bars. Simultaneously, the Mint’s buyback scheme increased its payout by 46% from 2022, resulting in the highest number on record.

The Mint credits the numbers to a “flight to safety” attitude from investors.

Stuart O’Reilly, market insights analyst at The Royal Mint said: “The potential for central bank rate cuts in 2024 is boosting the gold and precious metals market, as the prospect of lower rates boosts demand for non-yielding assets. Traders and investors are increasingly pricing in a Fed rate cut some time in 2024, which could accelerate the price of gold alongside a weakening of the US dollar.

See also: Why portfolio diversification is the only free lunch

“The dual impact of this move could turbocharge gold beyond recent market highs, as recent geopolitical and economic uncertainty, alongside strong central bank gold buying, has kept precious metals markets elevated.”

While the Silver Britannica remained the most popular product, the Mint also saw interest in its ‘fractional’ products, which can include a £25 investment through DigiGold or investment of physical gold for around £75.

Andrew Dickey, The Royal Mint’s director of precious metals, said: ‘We’re able to offer investors competitive prices for their gold, silver or platinum bullion products, whether they bought them from The Royal Mint or not.

“We tend to see a mix of investors and inheritors selling gold coins, particularly Britannias, Sovereigns and Krugerrands. This service enables investors to realise a profit, and supplies The Royal Mint with metal it can re-sell or recycle.”

Invesco also saw an increase in the gold market, with an increase of 11.6% in the fourth quarter of 2023, ending December at a price of $2,063 per fine troy ounce. Invesco noted that while political uncertainty may drive prices, it has also been helped by buyback programmes by central banks.

This article was written for our sister title Portfolio Adviser 

It shows that there is a growing appetite for alternative investments among Brits with investors planning to increase their asset allocation by 11%.

With the motivation behind this being UK inflation outstripping high-street bank savings rates according to two thirds of respondents.

Due to the cost-of-living crisis, 68% of investors said they are on the hunt for better returns from their investments, as 38% who haven’t already consider investing in alternatives.

This is due to the belief that these types of investments will offer better returns in the long term than traditional stocks and shares.

The data showed that 21% of investors are set to hold gold in their portfolio by 2024, with The Royal Mint reporting a 26% uplift year-on-year in the volume of gold investments during 2022.

‘Pendulum has swung’

Andrew Dickey, director of precious metals at The Royal Mint, said: “As high street savings rates and returns on the stock market remain low the pendulum has swung towards investments with the potential to offer better returns.

“It is clear from the data that investors are becoming more pragmatic about their portfolios and turning towards what are traditionally viewed as ‘alternative investments’ in order to boost their portfolio during this period.

“At The Royal Mint, we’ve seen an uplift in gold and silver investments in the first half of the year as investors turn to alternative investments as a means to diversify their portfolio, beat inflation, and generate wealth in the long-term.

“Whilst the data shows that bitcoin is set to drop in its investment appeal over the next year, more are investing in gold and precious metals in order to benefit from the investment’s ‘safe haven’ status. It is clear that precious metals are becoming a more mainstream investment choice for UK investors, having delivered positive returns for investors in recent years.”

After years of easy returns in equity markets, and with bond yields so far struggling to catch up with inflation, investors and money managers are increasingly paying attention to alternatives to find new sources of returns.

This makes sense, but while fashionable alternatives investments make the headlines, there is a case to be made for gold, the longest-standing alternative investment asset.

Aside from returns, gold’s most valuable characteristic is as a portfolio diversifier. Normally uncorrelated to equities, gold tends to become negatively correlated to equities – and assets with equity-like returns – when equities fall fast.

This change in correlation is unique amongst asset classes, and makes gold a far more effective portfolio hedge than other asset classes, government bonds or commodity indices, for example. Having an appropriate amount of gold in a portfolio would have increased the risk-adjusted return of that portfolio over the past 5, 10 or 20 years and would have dramatically reduced drawdowns too.

As well as returns and portfolio diversification, gold’s position as an asset that is no-bodies liability is also extremely valuable. Central banks, which have been net buyers of gold every year since the global financial crisis, know this.

The World Gold Council’s latest Gold Demand Trends report confirms that central bank purchasing was at record levels in H1 23 and there is little evidence that their interest is waning. It may come as no surprise that gold has indeed achieved better returns than most assets over the first half of this year and continued demand in this sector is likely to support the price in most near-term scenarios, but with upside potential if unexpected events occur.

Liquidity is another critical component in changeable markets and gold can provide the answer here. In the current market – and historically – there are ready buyers for gold in almost all scenarios. Part of this is due to the diverse, global gold market which means it is almost uniquely liquid.

What drives price and demand amongst the institutional or official sector today differs from the motives of, for example, jewellery buyers. While these factors may seem a distant consideration for an investor considering gold, it is vitally important for those with an eye on both price stability and the ability to exit or adjust positions to suit changing needs.

The current state of the market is an excellent illustration of gold’s highly liquid quality. Central banks in both developed and developing markets have been a major driver of gold demand for the past decade. The resultant high prices are less attractive for the large but price-sensitive jewellery markets in Asia, with the most prominent of those being India and China. Should the demand amongst large investors decline and prices fall, demand picks up elsewhere.

The self-balancing characteristics of the global gold market are unusual and allow for the fact that, as one segment of the market buys less – or even turns a net seller – others have historically always picked up the slack. This reduces the volatility of gold and provides support to the market under most circumstances. It has also been critical in driving the performance of gold in the most challenging market conditions.

Other alternative investment options certainly have merit in a diversified portfolio but liquidity, or a lack of it, is a well-documented problem. Even real estate investment, which is traditionally popular amongst non-traditional investments has had its fair share of problems, with investors gated in funds that have suffered severe devaluation on multiple occasions in the past decade. Liquid alternatives are still risky assets, but they are almost entirely immune from even short-term lock-ins.

Central bank demand for gold has also bolstered the performance and has shown that, despite some misconceptions, the metal is a driver of long-term returns, too. The price of gold has almost doubled over the past decade and it has done so stably and relatively uncorrelated to other assets.

This is a rare combination of characteristics that alone are attractive for most client portfolios, but is not an either-or choice between gold and traditional assets that provide the comfort of company balance sheets or investor income streams. Instead, it should be considered in the context of risk and return in the face of markets that are hard to predict.

Alternatives present a solution, but the true value of advice now will be on the individual characteristics of the wide range of alternatives on offer. The liquid, stable nature of a gold market that can provide long and short-term returns where other assets cannot is a compelling proposition indeed.

This article was written for International Adviser by John Reade, market strategist Emea for World Gold Council.