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Prompted by some client questions I have done a couple of notes recently on whether this is, indeed, an AI equity bubble. However, the original and best bubble is still going strong and has been picking up steam recently. Gold is now up 66% for the year and, remarkably, is up over 30% since mid-August. It feels like every day when I look at my screen gold is up (it is up again this morning) whatever the rest of the market is doing (today happens to be a down day for risk assets).
Full disclosure: I am not sure I am the best-placed person to write about gold. I have never been a fan of assets that have a cost to own but don’t generate a return (you can add wine, classic cars and Bitcoin to that list). But, equally, we bought gold last year for all clients where we could and obviously I am happy we did. That said, we are not adding to our exposure here. But nor are we taking profits or selling. The thoughts of a reluctant gold investor are below.
- When we originally bought gold, I mentioned (e.g. here in the Oil, Gas and Gold note) that our rationale was that global central banks were looking to reduce their dependence on the US dollar. This was started by Russia’s invasion of Ukraine. Plenty of non-Western countries (like China) saw what the US was able to do with their sanctions and wanted to minimize that threat. Gold was and is a good diversifier away from dollars. Trump’s openly nationalistic policies have only added to that demand. This demand is core and long-term and is the main structural reason we are keeping our position on.
- It was also interesting that, when we bought, there still wasn’t much demand from retail buyers. It looked like there might be upside if and when they chose to join in the gold bull market. I think part of the recent parabolic move upwards is the retail hot money is finally joining in in size. You can see US retail demand on the below (it also spiked in April when the tariff shock was at its height).
And, of course, Asian demand is also very important here especially as this develops into more of a momentum play. Here are the gold reserves held by the Shanghai Futures Exchange for example.
- Does this look like a safe haven to you? Assets that rise in price fast can normally fall pretty quickly too. But one lesson you learn in this business is that prices can move further and faster than you think possible at the time. And the fact that gold does not have a valuation anchor only makes it easier. Today we own gold as a diversifying asset rather than on any safe-haven thesis.
- One explanation I hear talked about is that this is a reaction to high deficits, debt levels and worries about inflation and monetary debasement. The contrarian in me doesn’t really buy this: government bond yields have been relatively stable over the last few months and have actually been falling recently. For a parabolic move higher in gold like the one we are seeing today I would expect to see some sort of dislocation in fixed income markets (which, to be clear, we are just not seeing today). But it is a good story, may yet prove to be right, and some people seem to believe it. This is probably enough to fuel some of the retail demand we are seeing today.
- One limit to the bull market is that if gold doubles (as it has done in the last 18 months) it will also double as a percentage of the central bank reserves. And at some point, banks will hit their buying targets and the core structural support for gold will drop away. I don’t think we are there yet but, if we did think this was the case, then this would be the driver for us to reduce and take profits on our gold holdings. But, for now, we remain strapped in to the rollercoaster, trying to enjoy the ride as much as we can.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
