EVERYBODY is asking me about gold. Specifically, why isn’t gold running higher? It started the year at $4,300 and went on a mad rush to a peak of $5,600 in late January. In dollars, gold is up 33.5% over the past year. It lags the Nasdaq, up 39% over the same period, and our local market, up 36% in dollars.*
These are giant numbers for a one-year return. If those were three-year returns, we’d be happy. But gold bulls are worried. The story for gold was about geopolitical threats and a move (albeit very slowly) from direct US dollar and US debt holdings. The US attack on Iran in February would normally have pushed gold higher, given that the reasons to have it grew stronger.
It didn’t quite work that way. A presentation by Chen Zhao of Alpine Macro reminded me of a great saying for those in the markets: “If something becomes too obvious, it’s not.” In other words, if everybody says gold is going higher, it probably won’t — because who’d be left to buy it?
Here are some points to consider about the stalling price.
The gold rush in January was followed by a rapid sell-off that spooked many investors, sending them to the sidelines.
We’re probably also seeing some central bank selling. Not because they don’t want to hold the metal, but rather because they need the cash and the value of their gold holdings has tripled in the past few years. One example is the Central Bank of the Republic of Türkiye: it sold about $8bn just after the US attacked Iran, to use to defend its currency and manage rising energy costs.
Some Gulf states may also be selling gold as their oil income has evaporated since the war started.
The point is that nobody knows why gold isn’t running. But that misses the actual question we should be asking: Is it still a good asset to hold?
For me, the answer is yes. If anything, it’s an even more important asset than it was at the start of the year.
Inflation is moving higher on the back of increasing energy costs; eventually, higher food costs will push inflation up some more. Geopolitical tensions have only increased since the US abducted Venezuelan president Nicolás Maduro and attacked Iran. And as for the dollar and US debt, both continue to see lower investor demand.
So, even though gold is off its high and gold miners are under pressure, I still hold both the metal and some miners. The miners pay great dividends, while the metal provides a stabilising effect in my portfolio. And it will rally again some day.
* Gold has since shed just over 9% which market analysts say is driven by the resumption of hostilities between the US and Iran
