Seven reasons to add gold to your portfolio

24 October 2023

The gold price hit an all-time high in Australian dollars last week, trading at more than AUD $3,100 per troy ounce (oz).

Given this price level, its understandable many investors feel they have “missed the boat”, and that there is no longer an opportunity to make money owning gold.

Below, we list seven reasons why that is not necessarily the case, why gold may go a lot higher in this cycle, and why its role as a wealth protector and diversifier remains as important as ever.

Inflation remains high: While its not currently sitting at 8-9% per annum like it was just over a year ago, inflation across the developed world is still at uncomfortable levels. With commodity prices beginning to increase again, inflation may actually go up, not down, in the coming year. That will likely be bullish for gold.

Interest rates are set to peak: Interest rates in Australia, the United States and around the world are likely close to peaking, with a good chance that central banks will cut them by early to mid-2024 at the latest. Lower interest rates often act as a catalyst for higher gold prices, as investors take money out of the bank and turn to assets like gold and other precious metals instead.

ETF investors continue to shun the metals: ETFs are financial products that trade on the share market. Gold ETFs are products that are designed to track the price of gold. Typically, when the gold price is rising, investors in these products are adding to their holdings. This adds upside momentum, but also carries risk. This time around ETF investors are cutting their gold holdings. That’s a good sign, as it means there is no froth in this part of the market.

Speculators have abandoned gold: Typically, when a market is charging higher, speculators go ‘all-in’ betting the price will keep going. Conversely, when a market is falling, speculators bet the price will fall. In past periods gold traded near USD $2,000oz, speculators were incredibly bullish. They were wrong though, as gold didn’t go far beyond USD $2,000oz. This time around they aren’t bullish at all. That’s a good sign!

Equity market risk remains high: Investors in the US stock market are still paying more than 30 times earnings to be owners of equities. That is very expensive by historical standards, and at a level that often leads to major stock market falls. Given gold has historically been the best performing single asset to own in periods equity markets fall sharply, its role as a diversifier may be crucial going forward.

Recessionary fears continue to build: From an inverted yield curve to a slowdown in housing, a decline in retail sales or falling consumer confidence, signs of a pending recession are everywhere. Gold tends to thrive in such periods, typically outperforming other assets.

Market history says gold goes higher: While gold will always be volatile in the short term, the weight of history suggests gold could go much higher in this cycle. In the great bull market run of the 1970s, the price of gold rose more than 20 times over. It hasn’t run anywhere near as fast this time, despite several catalysts that are arguably as if not more powerful today than they were fifty years ago, including elevated US debt levels, expensive equity markets, and geopolitical tensions.

It’s also worth noting that its not uncommon for gold to take time to work through important price milestones. The precious metal took the better part of 18 months from the time it first traded at more than USD $1,000oz to decisively break through and hold that level.

At the time, most people thought USD $1,000oz was the ceiling. Turns out it was a floor.

There are no guarantees, but there is a good chance history will repeat.

Seven reasons to add gold to your portfolio

24 October 2023

The gold price hit an all-time high in Australian dollars last week, trading at more than AUD $3,100 per troy ounce (oz).

Given this price level, its understandable many investors feel they have “missed the boat”, and that there is no longer an opportunity to make money owning gold.

Below, we list seven reasons why that is not necessarily the case, why gold may go a lot higher in this cycle, and why its role as a wealth protector and diversifier remains as important as ever.

Inflation remains high: While its not currently sitting at 8-9% per annum like it was just over a year ago, inflation across the developed world is still at uncomfortable levels. With commodity prices beginning to increase again, inflation may actually go up, not down, in the coming year. That will likely be bullish for gold.

Interest rates are set to peak: Interest rates in Australia, the United States and around the world are likely close to peaking, with a good chance that central banks will cut them by early to mid-2024 at the latest. Lower interest rates often act as a catalyst for higher gold prices, as investors take money out of the bank and turn to assets like gold and other precious metals instead.

ETF investors continue to shun the metals: ETFs are financial products that trade on the share market. Gold ETFs are products that are designed to track the price of gold. Typically, when the gold price is rising, investors in these products are adding to their holdings. This adds upside momentum, but also carries risk. This time around ETF investors are cutting their gold holdings. That’s a good sign, as it means there is no froth in this part of the market.

Speculators have abandoned gold: Typically, when a market is charging higher, speculators go ‘all-in’ betting the price will keep going. Conversely, when a market is falling, speculators bet the price will fall. In past periods gold traded near USD $2,000oz, speculators were incredibly bullish. They were wrong though, as gold didn’t go far beyond USD $2,000oz. This time around they aren’t bullish at all. That’s a good sign!

Equity market risk remains high: Investors in the US stock market are still paying more than 30 times earnings to be owners of equities. That is very expensive by historical standards, and at a level that often leads to major stock market falls. Given gold has historically been the best performing single asset to own in periods equity markets fall sharply, its role as a diversifier may be crucial going forward.

Recessionary fears continue to build: From an inverted yield curve to a slowdown in housing, a decline in retail sales or falling consumer confidence, signs of a pending recession are everywhere. Gold tends to thrive in such periods, typically outperforming other assets.

Market history says gold goes higher: While gold will always be volatile in the short term, the weight of history suggests gold could go much higher in this cycle. In the great bull market run of the 1970s, the price of gold rose more than 20 times over. It hasn’t run anywhere near as fast this time, despite several catalysts that are arguably as if not more powerful today than they were fifty years ago, including elevated US debt levels, expensive equity markets, and geopolitical tensions.