Markets became nervous that the new president’s 25% tariff on imports from Canada and Mexico and 10% levy on Chinese goods could trigger a trade war that would alter global trade dynamics.

Gold’s price reached £2,275 per ounce today (3 Feb), up from £2,103 at the beginning of January.

Funds such as Baker Steel Gold & Precious Metals, Jupiter Gold and Silver, and BlackRock Gold & General benefited the most from this surge in demand, beating all other Investment Association funds with total returns of 17.4%, 17.3% and 16.6% in January.

See also: Global markets fall as Trump tariffs spark trade war concerns

Following close behind them was Charteris Gold & Precious Metals, Quilter Precious Metals Equity, and Ninety One Global Gold, which were up 16.3%, 16.2% and 16.1% respectively throughout the month.

And gold’s rally could have further to climb yet, with many unknowns still lingering over how the affected countries may react – not to mention the nations that could yet have tariffs placed on their goods.

Russ Mould, investment director at AJ Bell, said: “The prospect of a full-blown trade war has spooked investors as they weigh up the prospect of widespread retaliation by countries on the receiving end of Donald Trump’s tariff frenzy,”

“Affected countries aren’t going to take the hit lying down and a tit-for-tat scenario is now looking real. That could result in higher inflation and put a stop to further interest rate cuts for the time being – exactly the opposite of what equity investors want to happen.”

See also: Baillie Gifford drops sustainable tag from £159m monthly income fund

On a sectoral level, IA Latin America had the best month in January, rising 11.4% on average thanks to its high exposure to commodities. Funds in the sector collectively hold over a third (35.3%) of their assets in basic materials and industrials.

But IA Latin America’s strong month could be short lived, according to Ben Yearsley, investment director at Fairview Investing. After being the worst performing sector of 2024 (falling 25% on average), last month could be a “dead cat bounce,” he said.

India delivers worst returns

Commodity portfolios may have had a strong start to the year, but IA India funds suffered the worst returns in January as the nation forecast its slowest economic growth in four years.

The latest Economic Survey projected gross domestic product to grow by 6.3% to 6.8% over the coming year, down from 8.2% last year.

Funds in the IA India sector fell 5.2% on average throughout January, with some dropping further than others.

Invesco India Equity was the worst performing fund of the month, with returns dropping 10.6%. It was followed by Ashoka Whiteoak India Opps and Comgest Growth India, which fell 9.6% and 9% respectively.

This is in spite of real yields and the US dollar remaining high, usually negatives for gold. But with a notable wobble over the past few weeks, could the party be about to come to an end?

Gold remains relatively lightly used among discretionary fund managers. The quarterly ARC Market Sentiment Survey found that 75% of managers had either no gold exposure or less than 2.5%. No manager had exposure above 10%. 

See also: IIMI urges launching boutiques to consider corporate structure

However, Graham Harrison, chairman at ARC, said: “An investigation of the changes in net sentiment over time displayed by discretionary investment managers to gold reveals a strong correlation with the performance of gold over the previous 12-month period.”

This pattern suggests discretionary fund managers could be about to turn more positive on the asset class. Equally, while the gold price has run up a long way, there are still supportive factors for gold.

George Lequime, manager of the Amati Strategic Metals fund, said: “The big driver in the past two or three years has been a massive pickup in central bank buying. Partly that’s been related to heightened geopolitical tensions, especially in the Middle East and Ukraine. Central banks in countries such as China, Turkey and India have increased the level of gold in their reserves.”

This is still happening. In its latest report, the World Gold Council said central bank buying slowed in the third quarter, but demand remained robust at 186t. Year-to-date central bank demand reached 694t, in line with the same period of 2022. Geopolitical tensions continue to be acute, and may accelerate with a new Trump administration starting in January. This should support demand.

Another factor to consider may be the incoming US administration’s tax, tariffs and deregulation agenda. The consensus is that this may be inflationary. Gold is often seen as an inflation hedge, though the strongest correlation has been during periods of hyper-inflation when investors start to have real fears over the value of their savings.  

Nitesh Shah, WisdomTree’s head of commodities and macroeconomic research, said that until recently investors had come back into gold exchange traded commodities (ETCs) after close to two years of selling between May 2022 and May 2024.

“Since May 2024, there have been approximately 3 million troy ounces of flows into ETCs (i.e. a 3.7% increase), worth $7.8bn (using gold prices as of 10/10/2024),” said Shah.

However, there are also reasons for caution. On the negative side, the gold price has moved a long way, and investors appear to be growing increasingly cautious. The uptick in ETC interest reversed in November, when they saw outflows of $2.1bn. This may have been the Trump effect, which brought a surge in demand for ‘risk on’ assets such as bitcoin and the dollar, but it still should give investors pause for thought.

See also: Analysis: Is the end of the magnificent seven nigh?

The appreciation in the dollar is particularly worrying for gold bugs. Although WisdomTree believes dollar depreciation pressure is already pent-up – and Trump himself has said he wants the dollar to fall – that is not the early signs from the market. The twin deficits should already been exerting pressure on the dollar, but it remains stubbornly strong, and this could continue if Trump enacts his agenda.

If, as is widely expected, the Federal Reserve cuts rates again, and real yields drop, this would be bad for gold. While Trump’s policies are expected to be inflationary, he has seen how the US electorate treated the last administration that presided over ever-higher inflation and may curb his ambitions for, say, tax cuts.

Gold produces mixed feelings from multi-asset managers. David Coombs, head of multi-asset investments at Rathbones, had been holding gold through the iShares Physical Gold ETF, but has been selling it down as the price has risen.

“The yellow stuff hit a record high of $2,787 a troy ounce in October and has remained elevated since. In context, that’s 35% higher than where it started the year and 84% higher than the eve of the pandemic,” he said.

He said while it can be useful to hold a small allocation as insurance against periods of weakness in financial markets, he sees better value in government bond markets and believes locking in yields of 4-5% before the Fed cuts rates again makes more sense.

“Markets that price future interest rates give a 75% chance that the Fed will cut by 25 basis points again when it meets on 17-18 December,” Coombs added.

Rob Burdett, head of multi manager at Nedgroup Investments, is more comfortable with holding gold, saying it still has favourable demand/supply characteristics, can offer diversification and has the potential to offset geopolitical and inflation risks.

WisdomTree’s internal gold model has a forecast of $3,030 for gold by the third quarter of 2025, assuming the consensus economic forecasts hold true. In a bull case, where inflation remains relatively high, but the Federal Reserve continues to cut rates, gold could reach $3,360/oz. In a bear case, where the Federal Reserve doesn’t cut, or even raises rates, gold could fall back to $2,440/oz over the same period.

Amati’s Lequime pointed out investors do not have to buy the gold price. Gold mining companies are, in his view, as cheap as they have been in his lifetime in spite of the rising price. This is particularly true for small and mid cap mining companies. They would usually outpace the gold price, but instead have lagged.

See also: Will bond yields stay higher for longer?

He said: “It’s because we’re fighting against other asset classes that are doing well. The million dollar question is what’s going to take for capital to come back into the sector? And partly, you need other asset class to really underperform and for there to be a pull back in the broader markets.”

After a year in which equity markets have soared, but been led by a narrow range of expensive technology companies, a pull back of this kind is not implausible. It’s been a good run for gold, but predicting its trajectory from here is considerably tougher.

This article originally appeared in our sister publication, PA Adviser

The global commodity market faces an of challenges that could influence its volatility, such as new Trump presidency in the US, ongoing tensions in the Middle East, and natural disasters across the coasts of Mexico and North America.

However, there is also another factor that is probably the most underestimated one — the evolving economic deterioration of China. So why and how exactly is China influencing the commodities market, and what changes can we expect in the near future?

China’s economy has peaked

China has long been considered one of the biggest world economies, but today’s forecasts are not bright anymore — many analysts think the country’s economic peak already passed in 2021.

The main reasons behind this phenomenon is excess production capacity, a downturn in the housing market, and low consumer activity. All together, they will continue to put pressure on prices.

As a result, China’s consumer prices showed no growth in September, with a year-on-year increase of just 0.4%. Core inflation, excluding volatile energy and food prices, slipped to a modest 0.1%, marking a clear sign of a broader economic slowdown.

See also: Is China at a turning point, or will it disappoint yet again?

This also coincides with China’s cheap labour resources nearing exhaustion, an increase in youth unemployment, an ageing population, and may countries in Europe and the slowing down imports their imports of Chinese goods.

The Chinese government is working to manage these changes, yet the situation remains challenging. And without further stimulus, China risks falling into a prolonged period of deflation similar to Japan’s experience in the 1990s.

These incentives will most likely be further increased in order to avoid the Japanese scenario and provide a gradual slowdown in economic growth to about 3.5 to 4.5% per year over the next three to five years.

China’s economy drives commodity markets

Economic shifts in China have a direct impact on global commodities. The country remains the world’s largest importer of key resources such as oil, and any changes in its purchasing behaviour are reflected in global markets.

The volume of China’s oil imports amounts to 11 million barrels per day, which is only slightly below the level of September last year and corresponds to the average figures for the last months. Overall, import volumes remain stable.

However, the average price of imported oil in September decreased as worries about demand from China pressured market sentiment. The oil price has since surpassed $60 per barrel.

See also: Fairview’s Yearsley: China becomes ‘story of September’

As for energy, it remains one of the key components of the Chinese economy. Despite the aforementioned economic hurdles, China has executed strategic adjustments to its energy sector that may soften its economic landing. From 2022 to 2024, the country managed to cut energy costs per unit of GDP by 5–15%.

The decrease occurred due to a few reasons. The first is linked to cheaper purchased resources since China mainly imports resources from countries in difficult economic conditions and offers them discounts of up to 30% relative to market prices.

Secondly, the country has modernized its own energy system, which has increased its efficiency and lowered prices.

How should investors adjust their strategies?

Faced with the problems within the Chinese economy, investors should pay attention to new opportunities in other regions and sectors.

It is worth looking at American companies, especially in promising areas such as energy, artificial intelligence, robotics, and big data. They are likely to increase their output, which also opens up new investment opportunities.

Indian and Mexican companies that can replace Chinese manufacturers in global consumer markets may also be promising. These two countries are actively developing their production facilities and becoming key alternative production centres.

At the same time, it is important to monitor the large volume of natural resources that China exports and look for alternative suppliers. This will help prepare for possible restrictions on Chinese exports or the introduction of export duties.

Some investors are already moving away from Chinese assets and switching to more reliable instruments such as gold or US bonds, with foreign direct investment in China turning negative for the first time since 1998. 

Of greater importance in the near term are underlying supply-demand dynamics. Supply remains constrained, underpinned by rising costs and production difficulties. However, demand-side dynamics are likely to change. Gold ETFs have experienced outflows in 24 of the past 36 months. This trend aligns with the recent surge in real yields. Surprisingly, as shown in the chart below, gold prices have remained strong despite their usual negative correlation with real yields. However, sanctions against Russia likely triggered fears of de-dollarisation, driving a surge in central bank demand for gold across many emerging economies, especially China.

As western central banks now begin to ease, a shift in western demand for gold is expected as real rates – the difference between nominal rates and inflation – decline. This, coupled with strong demand from emerging economies underpinned by an increasingly negative perception of the dollar as a reserve asset, will provide significant support for gold prices.

See also: Knacke’s money maps: Health is wealth

Beyond the base case, gold offers attractive ‘optionality’ as a hedge against unpredictable events including geopolitics, trade wars or changing market liquidity. When uncertainty rises, gold’s appeal as a safe haven only grows stronger, which is invaluable given the risks of financial repression are misunderstood, and those posed by macroeconomic and geopolitical turmoil underappreciated.

With gold under-owned by western investors and strong underlying price trends, the outlook for the metal is bright. Indeed, its status as a store of value is unlikely to change, whether you live in America, Africa or Asia. For investors looking for a stable, long-term asset with capital preservation characteristics against both inflation and geopolitical instability, gold remains an essential asset. The shiny metal is just getting started.

This article originally appeared in the September issue of Portfolio Adviser magazine

Debt peaked past $313trn at the start of the year after borrowers added around $100trn of new debt to their books since 2015, according to the Institute of International Finance (IIF). It noted that $89.9trn of that was made up of government debt.

These lofty debt levels made Pidcock cautious and led him to make gold mining company Newmont the sixth largest holding in the portfolio, representing 4.8% of the £1.9bn fund.

“Fiscal policy globally is very loose, and that is a concern,” he said. “Budget deficits – even when economies have supposedly been strong – have been way too high. And that’s why we invested in gold mines.

“We thought the gold price is probably going to go up because these paper currencies are just going to get more and more diluted as governments have to print more money to pay the interest on the debt they’ve accumulated.”

Global debt (in USD) since 2015

Pidcock’s exposure to the precious metal may not seem high, but he said “everyone should have some exposure to gold, whether it’s as an insurance policy or just sensible diversification”.

And an allocation to gold may be all the more important now that its purpose within portfolios is rivalling the role traditionally held by bonds.

“If there was a new geopolitical shock, I think gold would be seen as a place to hide,” Pidcock said. “Government bonds are traditionally seen as that, but if that political shock required a lot more government expenditure, then government bonds might not be the safety net that they have been in the past.

“We saw in Covid that government expenditure ballooned and created a lot more inflation, which wasn’t great for bonds, and that’s probably where we are again now. The first reaction of governments in a crisis is to spend even more money, so I would say everyone should have a little bit of gold.”

See also: Crisis point: Concerns grow over mounting government debt levels

This was echoed by Sotirios Nakos, multi-asset fund manager at Aviva Investors, who agreed the precious metal was encroaching upon the downturn protection function historically reserved for fixed income.

“Gold is challenging the traditional role of bonds in portfolios,” he said. “While gold is generally negatively correlated with real interest rates — meaning higher real rates increase the opportunity cost of holding gold —this relationship is not stable and varies over time.

“Particularly during periods of high inflation, the real rate effect on gold becomes smaller, making it a valuable asset in a diversified portfolio, potentially rivalling bonds. For cautious portfolios, however, the volatility associated with gold can limit its overall allocation.”

While gold does have its appeals as a safe haven in a high debt world, Rathbones multi-asset manager Will McIntosh-Whyte questioned whether its rallying price can be maintained.

An ounce of the precious metal will set investors back £1,951 today, which is 25.5% more expensive than it was a year ago. But McIntosh-Whyte said its price may have been artificially accelerated by central bank buying.

See also: Gold hits record high: Fund picks to play precious metals

The World Gold Council estimates that central banks bought 2119 tonnes of gold in 2022 and 2023, which was three times higher than they had in the prior two years combined. And they pushed their buying even higher in 2024, purchasing an additional 484 tonnes in the first half of this year.

A slowdown in the central bank buying that has fuelled a powerful rally could see gold’s soaring price come to a standstill, according to McIntosh-Whyte. Fixed income could therefore keep its seat as the best protector in the case of a downturn.

“My issue with gold is that it has obviously had a very strong run,” McIntosh-Whyte added. “It’s always tricky to rationalised movement, especially when there’s been a decent amount of buy from places like China. With a weak property market, I think a lot of Chinese households are turning to gold, and the same is happening in Japan in light of the country policy that we’ve seen there.

“There has just been a significant amount of central bank buying over the past year or so – it’s my view that US treasuries are a more reliable instrument to help protect portfolios in the majority of scenarios.”

See also: Interest rates: Tough decisions ahead for central banks

Yet the US government’s towering debt levels have not gone amiss on McIntosh-Whyte. The nation’s $35.3trn of debt accounts for around a third of all global government debt, making McIntosh-Whyte slightly more sceptical of his US treasury holdings.

“Earlier this year, we started slightly diversifying our exposure away from the US and into a number of European nations where we see the fiscal situation being a bit stronger, and where we’re more relaxed about the inflationary environment,” he said.

“But that’s coming from a position where we’ve actually held a lot. So I’m not rushing to sell my US treasuries to put it into gold – I’d rather just keep a little bit of dry powder.”

Covid unleashed a unique combination of shocks to commodity markets, impacting both supply and demand simultaneously – to the point that almost five years later the sector has yet to fully recover.

Since then it has been a case of feast or famine for investors. Optimists have touted super-cycles as economies open up – only for new Covid variants, supply and demand issues and wider geopolitical concerns to all play a role in dampening the optimism.

This year has been a continuation of the uncertainty. A strong start to the year has since ebbed away as a slowdown in China’s economy has raised concerns about demand for oil, copper, and other commodities. There seems to be little light at the end of the tunnel for China’s commodity-producing sectors – property and infrastructure – while there are also fears the current slowdown in production in China bears strong resemblance to the crash in the economy in 2015-16.

Commodities, as represented by the S&P GSCI – a benchmark of 24 commodities in agriculture, energy and metals – were up 16% year-to-date by April 2024, but have since fallen back to just 1.8%. This compares to a return just shy of 12% for global equities.

But despite the short to mid-term confusion, the long-term trends remain as strong as ever. First and foremost, commodities have a number of mega-trend themes which rely on them. Think of the likes of electrification for renewable energy and infrastructure, while metals are needed to build data centres to continue to improve both our connectivity and AI growth.

See also: Is a bitcoin allocation a diversification ‘cheat code’?

From an investor perspective, commodities are a key diversifier to equities and bonds. Take 2022 as an example: in a challenging market where inflation and interest rates rose in most of the developed world, global equities fell 8%. By contrast, commodities rose over 40%.

But confidence remains at a premium. Research from Lazard found that as of January 2024, the global allocation to commodities stood at 1.7% of total portfolios. This is well below the 4-9% range that recent Bloomberg analysis – based on sharpe ratio, risk profiles and historic returns from April 2003 to March 2024 – believes is ideal. I find that interesting given the geopolitical uncertainty and some of the longer-term supply and demand challenges for many metals, which could result in price rises.

We have always tended to break the sector into four subclasses: energy, precious metals, industrial metals and agriculture.

Energy seems a logical starting point. Oil has been quite a weak bellwether for global demand. Traders and analysts have been overwhelmingly bearish on oil in the past few months, although there are longer-term concerns about shortages should production not increase, with the ESG push meaning fewer oil rigs have been drilled in recent years.

The more immediate backdrop to this is that geopolitical tensions continue to rise. Russia’s invasion of the Ukraine shows no signs of coming to an end, while recent tensions between Israel and Iran saw the oil price spike before settling down.

Shipping costs have also escalated due to the attacks in the Red Sea, forcing some of the world’s largest shipping companies to suspend routes and redirect their vessels. Going the long-way round clearly has time and cost implications. The hope is that oil will establish itself as a hedge against growing uncertainty.

See also: Is the landscape finally changing for commodities?

Gas prices spiked following the outbreak of war in Ukraine, as Russia supplied 40% of Europe’s natural gas. This has since dropped back due to the likes of mild winters and with expectations that gas storage will reach capacity in Europe by September this year.

Industrial metals are strongly tied to some of the long-term themes I discussed earlier. Copper has fallen back from its all-time high in May 2024. China is the biggest user of the metal, so its fortunes can often be tied to its economy.

Copper is essential for the likes of electrification, and long-term supply and demand metrics are very favourable. For example, research from S&P Global Market Intelligence projected that global refined copper demand will nearly double from 25 million MT in 2021 to about 49 million MT in 2035.

Nickel prices recovered from six-month lows recently, but remain firmly in a bear market, trading down more than 20% from highs reached only three months ago. Lithium prices continue to struggle amid the EV slowdown.

I do not want to spend too much time on gold – but structural demand forces have been very supportive for the yellow metal, from buyers in emerging markets, China and money managers. Ongoing geopolitical uncertainty and the start of rate cuts should be beneficial for the physical gold, which reached an all-time high in August 2024.

Gold miners have generally disappointed for a long time but have also started to pick up, with the hope that the cost to mine gold becomes cheaper as inflation falls. The price of silver also soared in the first half of 2024, hitting levels not seen in over a decade.

See also: Gold hits record high: Fund picks to play precious metals

Agriculture tailwinds are perhaps the clearest of them all. It is crucial to economic growth, accounting for 4% of global GDP. More importantly, the need is paramount, with predictions that over 600 million people will face hunger challenges by 2030. Plenty of packages are in place to improve agriculture across the globe.

A quick run-through of some of the underlying assets within commodities indicates just how diverse the outlook within the sector is over the short-to-medium term, but the longer-term tailwinds continue to underpin the global economy. It is also a diversifier to traditional asset classes.

Investors looking for exposure may want to consider the BlackRock World Mining trust, which offers exposure to mining and metals companies worldwide, or the TB Amati Strategic Metals fund, which has exposure to the equities of numerous precious and industrial metals. Those who prefer a specific mandate may like the Jupiter Gold and Silver fund.

Gold is potentially on the cusp of a major bull market – but what is driving the yellow metal’s upward trajectory?

The value of gold often traces out a path dictated by US real rates. There is no yield on it, so when real rates are high, investors want to funnel money into the economy and out of gold to benefit from these high returns.

But when real rates are low, investors seek haven in gold, seeing value in its elemental defence against human progress.

However, gold has ceased to follow real rates since early 2022. As the Fed pushed real rates higher, gold ought to have struggled. While gold did not rally, it did hold its value in the face of real rates moving quickly through zero and up above 2%.

In late 2023, as the pace of the real rates increase slowed, gold continued to rally substantially.

Official buying steps up

This change has been driven by an increase in central bank accumulation. Buying scaled up significantly as Trump imposed tariffs on China in 2017, then further following the breakout of Russia’s war in Ukraine in early 2022. This seems to be the key geopolitical juncture for a shift in the behaviour of the gold price.

Europe joined the US and the rest of the developed world in putting sanctions on Russian banks and freezing their overseas assets. The move sent shockwaves throughout the world as countries that were not aligned with the US feared their assets would be similarly confiscated or frozen.

See also: Gold hits record high: Fund picks to play precious metals

Despite the significant accumulation of gold by non-aligned banks, the amount of gold held is still small relative to the West. This means pushing up the gold price reflates Western balance sheets more. Non-aligned countries need to be subtle in their buying; it is not in their interest to drive the price up quickly. So why are they buying in such force?

There are two answers to this question. The first is that China is weak. The second is that China is lying.

China forced to accumulate gold

China accumulating more gold does not herald the demise of the US dollar, US hegemony or power. It points to weakness rather than strength.

A redistribution of economic power would break the Chinese state and so will only happen in the case of an economic collapse. Hence, the surpluses will continue. Where to invest these surpluses is fast becoming a major problem for China.

The lack of liquid financial assets outside the West leads China towards outbound Foreign Direct Investment (FDI). This means doing business in jurisdictions that lack political stability and have weak legal systems that are vulnerable to politics and can’t or won’t enforce contract law.

As the West has discovered, even with the full might of the international institutions behind them, claims tend to fall secondary to local politics. China found this in its first iteration of the One Belt One Road scheme. Many investments have been overbudget, unfinished or abandoned.

Gold is a frustrating asset to accumulate as it is less liquid and useful than US treasuries and leads to higher volatility in the end goods you want to hold your purchasing power against. It is only when you consider gold accumulation as an option versus expropriation risk, or a 50-cent return on FDI, that China’s policy starts to make more sense.

Not enough bullion

There also isn’t enough gold. The current account surplus of China alone is equivalent to the entirety of global gold production at today’s prices.

Of course, China isn’t the only buyer. The bull case for gold does not rely on China recycling the proceeds from selling down its current Western bond holdings; not wanting to add to existing expropriation risk is enough, and there is not much else to buy.

Gold is a murky market with clear data only extending to what is mined rather than who owns what. Partly, this is because those attracted to gold want to evade attention for one reason or another. That said, there is enough information to put together a rough picture.

See also: ARC: Positive gold sentiment not reflected in portfolio weightings

We have a fair idea of how much central banks have been buying in aggregate, as these purchases tend to be done in the West and using dollars. These purchases are considered “monetary gold” for use as recognised reserve assets by central banks, accepted by credit rating agencies and international institutions like the IMF.

Buyers through this route are easy to track in aggregate as they tend to be significant orders in much larger bar sizes than other investors. China’s official sector likely holds significantly more gold than is officially reported. Its central bank seems to follow the international rules for reserve accumulation but often declares its holdings with a large delay.

China’s buying spree

In the last couple of years, the buying pace by central banks has doubled but the increase in the sum of all gold reserves claimed has stayed around the same level. History (and market chatter) tells us that of the 1,250 tonnes of undeclared gold purchases over the past two years, the vast majority is China. That would mean its true reserves are closer to 3,000 tonnes rather than their stated reserves of 1,750 tonnes.

This is still only half the story. All locally produced or ‘privately’ imported gold in China goes through the Shanghai Gold Exchange. Net imports of gold into China have been around 24,000 tonnes since the exchange was established in 2008. This is large compared to central bank reserves, even if you think the true reserve number is understated.

We estimate that China’s true state holdings of gold are the world’s largest. That means non-aligned countries are not far behind the volumes of gold held by the West. As it reaches parity with the West, China’s desire to purchase gold in the shadows could come into the light more quickly than the market expects.

However, wealth managers appear to be less positive on the outlook for the commodity, with research from Asset Risk Consultants (ARC) finding that 75% of private client discretionary investment managers have under 2.5% gold exposure.

“The lack of gold exposure in portfolios today cannot be explained away by managers being negative on forecast returns for gold over the short to medium term,” said Graham Harrison, chair at ARC. “Indeed, net sentiment towards gold was strongly positive, at +35% in our latest survey.

“However, an investigation of the changes in net sentiment over time displayed by discretionary investment managers to gold reveals a strong correlation with the performance of gold over the previous 12-month period. Sentiment was at its most negative in the period 2012-2014 and has tended to be positive when gold price momentum has been positive.

“From a value investing perspective, there is no doubt that gold’s investment fundamentals are weak,” he added. “Professional investment managers tend to be divided on whether gold is a store of value in turbulent times but are united in the view that, over the long term, history reveals that gold is at best an inflation hedge.”

See also: Pridham report: Over half of UK fund groups grow net sales for third straight quarter

Role of precious metals in a portfolio

Precious metals have often been viewed as a store of value and a hedge against inflation. While both gold and silver are seen as diversifiers due to their low correlation with traditional assets, Sheridan Admans, head of fund selection at TILLIT, says gold is considered the better diversifier of the two.

“Historically, gold and silver have provided a reliable hedge against inflation and have performed well during periods of US dollar weakness. These factors, combined with the safe-haven status of precious metals, particularly gold, are key reasons why investors choose to hold them as part of their portfolio.

“However, investors should be cautious; there is no such thing as a free lunch. Whilst gold and silver can provide an element of protection within the portfolio, they pay no yield and can be highly volatile in terms of price. It is important to remember gold and silver are commodities and their value is intrinsically linked to their scarcity; sharp swings in demand or supply will result in sharp swings in the price.

He adds that it is recommended to cap exposure to precious metals at between 5-10%.

See also: Morningstar: Fixed income funds see highest net flows in five years

“This level can provide some reassurance that there is downside protection within your portfolio but is not so significant as to dramatically change the volatility of your portfolio or have disproportionate opportunity costs in terms of the potential income return.”

He tips both the HANetf The Royal Mint Responsibly Sourced Physical Gold ETC and the $820m Jupiter Gold & Silver fund as strategies for investors looking to play precious metals.

Jupiter Gold & Silver invests in the two metals via equities and bullion, with the allocation of the fund varying depending on how bullish or bearish the manager is.

“If the manager has a bullish outlook, the fund will hold significantly more in equities than bullion and a fairly equal split between gold and silver,” says Admans.

“Whereas if the manager has a bearish outlook, the fund tends to hold a fairly equal split between equities and bullion, and the weighting to gold tends to be higher. Most precious metal funds focus on gold mining companies. The silver and bullion factors, alongside the overall flexibility, make this fund quite unusual.”

Meanwhile, the passive Royal Mint Responsibly Sourced Physical Gold ETC is a lower carbon, physical gold product that keeps investors’ gold holdings in allocated accounts in the vaults at the Royal Mint.

“The partnership with The Royal Mint means HANetf has full control and transparency of the supply chain involved in the creation of the gold bars,” says Admans.

“This is crucially important to understanding the provenance of the gold being held on an investor’s behalf. HANetf has insight into how the gold is extracted, the treatment of the miners, etc.

“This is a unique product in that it offers exposure to gold with an ethical angle as well as the backing of the Royal Mint.”

Following the dip in global financial markets on Monday (5 August), bullion trading via The Royal Mint’s website surged 336% compared to the daily average so far this year.

The number of investor transactions was up 53% on the average day, while one ounce gold Britannia coins, digital gold, sovereign coins and one kilogram gold bars were among the most popular products as gold prices dropped in Monday morning trading.

The Royal Mint also noted a 68% increase in first-time investors buying precious metals on Monday.

See also: ‘Has the Fed made a mistake?’: Weak US jobs data sparks recession concerns

The Royal Mint’s markets insights manager Stuart O’Reilly said: “As global financial markets plummeted in Monday’s trading, precious metals investors were split into two camps. On one side, traders were forced to reduce their holdings in gold and silver following recent market highs so that they could cover losses in global equity markets.

“At the same time, as precious metals prices dropped after this sell-off, UK retail investors viewed this as an opportunity to lock in lower prices while increasing their allocations to gold and silver.

“Clearly, many were opportunistically buying the dip as gold dropped below $2,370 per troy ounce after rallying to more than $2,470 the Friday before.”

Since Monday’s low of £1,856.71 per troy ounce, gold has rebounded slightly to £1,894.41 (as of 11am, 8 August).

O’Reilly added: “As the home of precious metals investing, we often see how significant market events, such as Monday’s shock, impact sentiment to precious metals.

“From our experience, gold and precious metals investing grow in popularity during more challenging times for the global economy as investors look to diversify their portfolios and hedge against inflation.”

See also: IA: Equities experience positive quarter after June £1.2bn inflows

According to the latest quarterly ARC Market Sentiment survey, within their typical ‘steady growth’ investment solution, some 75% of the 83 managers who responded had either no gold exposure, or a weighting less than 2.5%. Meanwhile no respondents had a weighting over 10%.

Graham Harrison, chairman of ARC, said this lack of gold exposure cannot be explained by managers being negative on forecast returns, with net sentiment towards the yellow metal reading strongly positive at 35% in its latest survey.

“However, an investigation of the changes in net sentiment over time displayed by discretionary investment managers to gold reveals a strong correlation with the performance of gold over the previous 12-month period,” said Harrison. “Sentiment was at its most negative in the period 2012-2014 and has tended to be positive when gold price momentum has been positive.”

While the price of gold has risen about 570% since December 2003, Harrison said this compares with a 610% total return from global equities, while he added gold as an asset class has been much more volatile.

See more: Quilter’s Wealthselect MPS sells down gold position

“There is an old adage, first attributed to Benjamin Graham, a value investing pioneer, that over shorter periods the stockmarket is a voting machine but over the longer term it is a weighing machine,” he said. “In other words, over the shorter term, sentiment dominates but over the longer term, fundamentals drive relative asset performance.

“From a value investing perspective, there is no doubt that gold’s investment fundamentals are weak. Professional investment managers tend to be divided on whether gold is a store of value in turbulent times but are united in the view that, over the long term, history reveals that gold is at best an inflation hedge.”

Commenting on ARC’s findings, Ryan Hughes, investments director at AJ Bell, said while gold does form part of the asset classes it models for potential inclusion in its long-term strategic asset allocation, as yet it has not made it into the portfolios.

“In our long-term modelling, we assume an expected return in-line with inflation and as a result, our optimisation process has not judged gold as an asset class worth including on a long-term basis,” he said. “That said, it is an asset class that we follow and it can be used tactically if we decide to do so.

See more: Time for silver to outshine gold?

“The more recent rally seems to be driven by Chinese central bank purchases rather than any real ‘retail’ demand as China looks to reduce it exposure to US dollars in its reserves. We will watch with interest if this demand broadens out further from here.”

Chris Metcalfe, chief investment officer at Iboss, however noted that gold has been it best-performing asset over the last three years, and added that continues to benefit the portfolios because of its diversification benefits.

“In the first 15 days of July, the gold miners we own were up close to 15%, which has benefitted performance overall,” Metcalfe said. “We still maintain that there is much more value to come in gold.”

“This asset class traditionally performs poorly in a higher interest rate environment because it doesn’t yield anything,” he added. “Despite this, the price of gold keeps setting record after record, and this is because of the different dynamics at work with the central bank buying and wider afield; we still think there are many opportunities in commodities and everything associated with them.”

This article originally appeared on our sister publication, PA Adviser

Investors don’t need to be accurate about the future to make high returns, but having a good understanding of the key macro drivers is essential to understanding risks.

Politics and economics are in an era of great flux, accelerated by disruptive technology. These four factors are morphing global markets, yet create a fertile trading environment for those looking to exploit relative value opportunities.

Political volatility

We have all heard the famous saying that a week is a long time in politics, so trying to look ahead into the next three years is a particularly challenging task given the current environment.

Perhaps Trump will not win the coming US election – he could be curtailed by a number of issues such as the Roe v Wade female vote.

Ukraine may well win back territory as US and Europe provide meaningful arms and ammunition. And China could distance itself from Russia as Putin’s power becomes vulnerable, throwing up huge concerns about legacy nuclear weapons and a Russia breakup.

Closer to home, a new Labour government in the UK may decide to review the current version of Brexit and create a softer form of agreement – a change in policy that could be justified should intelligence come to light detailing foreign interference in the UK referendum.  

None of the above outcomes are out of the question, but unfortunately neither is the opposite.

See also: Rathbones: 81% of investors expect UK equity growth over next year

We are living in changing times where, after the Soviet Union’s demise, the uni-polar US’s role as the world’s only policeman is rapidly being replaced by a multi-actor model of China, Russia, India, Turkey and even Europe.

This new playing field may take some time and there are likely to be mishaps to sort out – which is not ideal when nuclear armed players are involved.

The geopolitical risks that have been generally dismissed by the markets as temporary or inconsequential until now may be fundamentally underpriced in the future.

Economic uncertainty

We could also see renewed economic momentum in China after it has stabilised the property market and state-owned enterprises elevate commodities.

Internal policy is increasingly focusing on developing domestic demand – a significant turn from the past – but it could possibly be a reaction to increasingly hostile tariffs from western nations.

A soft landing in Europe and the UK could lead to a maximum of four to six interest rate cuts in total and we could see the US limited to one to three cuts as inflation and the economy pick up post-election.

Irrespective of election outcomes, fiscal spending may not recede as some expect, keeping economies hot and fiat money cheapening. High-for-long rates will ultimately start biting inefficient sectors, and dispersion could begin to increase across investments. High refinancing costs of illiquid private equity investments could also cause shockwaves.

We challenged the idea of immaculate disinflation. Financial markets are currently pricing a swift return to 2% inflation without a substantial increase in unemployment or deceleration of economic activity as credit spreads remain tight and equity valuations are elevated.

The under-priced danger is a second wind of demand that would reignite inflation and force the Fed back into tightening mode. Early signs show that consumers are sensitive to lowering rates, which could accelerate demand, buoyed by job security and rising wages.

Will shrinking central bank balance sheets rock the boat? The unwind of unprecedented expansion of global central bank balance sheets has been very smooth thus far, although the ECB is due to begin unwinding their most radical PEPP policy that was heavily skewed towards peripheral countries.

A lot was made out of simultaneous increase of central bank balance sheets and asset price inflation over the last decade and a half. Yet we have not seen the opposite dynamic during the reversal of these policies.

If the rising tide floats all boats, who will not be wearing trunks when the tide goes out?

Legitimising cryptocurrency

The Gold Council could launch a gold digital currency, which will push the precious metal’s price higher as it is tokenised on blockchain and fully backed by its own actual collateral.

This could start eating cryptos lunch. With 2% global supply each year, it could show the stability and digital liquidity to be a new base currency and could be adopted by many emerging market countries.

Other stable coins backed by gold have tried, but this one would be different. Having a legal, legitimate, and fully transparent auditable track, from the mine to your electronic wallet, would be a game changer. You would in fact be buying a unit of verified digital gold, not a meme token backed by gold – there is a difference!

See also: Will central bank dreams of a ‘soft landing’ become a reality?

As fiat central banks continue to print money as though it is made of paper and rely on the past glories of balanced or surplus budgets to keep the faith, one wonders when someone call out the emperor for not wearing any clothes.

Fiat money continues to be undermined by multiple issues. Wars, green energy transition, ageing populations are all incredibly expensive. These ever-increasing burdens need to be financed by shrinking working age populations in many of the western economies.

When do the debt numbers become untenable and what are the consequences? De-dollarisation has started, as the weaponisation of foreign reserves held at external central banks can be frozen should you fall foul of international law. A gold digital currency could provide a liquid stable solution.

Adoption of AI

Artificial intelligence is an powerful tool for increasing productivity, mainly in services, but initially without the joblessness. However, the next generation will likely wipe the floor with what has come before.

The long-term effect might be severe deflation as intelligent 24/7 robots and software kill the competition (human bargaining power). The developed world could then dissolve into three-day working weeks supplemented by universal basic income (UBI) that will placate the masses.

The unfortunate side effect could be that the developing economies are no longer on the industrial revolution conveyor belt, as sourcing ever cheaper human labour is no longer essential for global capitalism to flourish.

In fact, the growing uncertainty of protecting trade routes through flash points such as the South China Sea or Gulf of Aden will compel more home grown automation. This will then truly drive mass economic migration as international developed market demand stagnates, unless a concerted effort is made to provide meaningful economic development in emerging countries.

See also: Time for silver to outshine gold?

Gold has hit record highs since the start of the year, but those who held gold mining companies on the assumption that they benefit from its surge have been disappointed. That is, until the last few weeks when share prices have surged. Have investors missed the rally, or is it just getting started?

The gold price has been on a tear, rising from below $2,000 per ounce in February to its current level of $2,300. Its strength has been fuelled by central bank buying, geopolitical unrest and growing risk aversion – all in spite of high yields on bonds (which typically send the gold price lower). 

However, gold mining equities have not followed suit. In 2023, the MSCI ACWI Select Gold Miners IMI Index rose just 13.9%, compared to 22.2% for the MSCI ACWI. There were concerns about the impact of inflation on the day-to-day running costs of mining companies, particularly the rising cost of labour and diesel fuel.

That all changed recently. Over the past three months, the Gold Miners index is up an astonishing 34.9% against a return of 3.9% from the broader index. Fund managers believe this rally might only just be getting started, with valuations for many companies still at relatively low levels, and the companies themselves in good health.

But it is not just gold miners – gold typically leads the way for other precious metals, such as platinum and silver. 

Consolidation across gold mining companies and the precious metals sector as a whole has also supported prices. In 2023, Newmont Corporation successfully acquire Australian-listed Newcrest Mining to create the world’s largest gold producer.

Likewise, Rio Tinto is in the process of bidding for Anglo American, which is the world’s largest producer of platinum – accounting for around 40% of world output – as well as being a major producer of diamonds, copper and nickel. Many fund managers believe there is more consolidation to come in the sector.

George Cheveley, manager on the Ninety One Global Gold fund, believes this strength can continue if the gold price remains in its current trading range.

“Equity valuations look compelling as cashflows appear set to jump after the latest rises,” he said. “In a rising price environment, the companies tend to outperform. While this did not happen in 2022 or 2023 due to inflationary pressures on costs and the overhang from the pandemic, we see signs of these abating.

“We are seeing a number of companies with good growth, which should also see lower production costs per ounce. So, improving costs and increased merger and acquisition activity should result in the equities of gold companies outperforming a rising gold price overall.”

Cheveley is encouraged by the recent moves in gold mining companies, which he believes are more in line with the performance in recent cycles.

See also: High net worth voters back Labour despite private school tax

The managers of the BlackRock World Mining trust also increased their exposure to gold producers in 2023 given the improved gold price outlook.

Co-manager Olivia Markham said: “We have maintained our strategy of focusing on high quality producers which have an attractive operating margin and solid production profile and resource base.

“Typically, gold royalty companies offer a higher quality and lower risk exposure to gold as they do not face operating and capital cost inflation.”

Gold miners are also drawing the interest of global fund managers. Alec Cutler, manager of the Orbis Global Balanced fund, holds around 6% of the portfolio in gold, with around 4% in gold mining shares, including Barrick Gold and Newmont. This also gives him some copper exposure.

“When you mine for gold, copper pops out and that looks like a good place to be for the longer-term,” Cutler said. “The miners have been weak because they’ve been whacked by inflation. Their costs were going up because of Covid restrictions, which hit productivity, but that’s reversing.

“Their second biggest cost is diesel fuel and the price of diesel fuel went up, but that’s reversing too. Now the price of gold and copper are marching higher, so these companies are seeing positive margins.” 

Ned Naylor-Leyland, manager of the Jupiter Gold & Silver fund, argues for the inclusion of some silver exposure as well. The silver price has outpaced the gold price since February, rising almost 40%.

He believes this may continue, stating: “Silver benefits from monetary and industrial demand, as well as being historically undervalued (still 45% below its high from 2011). Silver has a long track record of outperforming gold when there is increased flow and participation in the asset class.”

Mining companies have also been through an important sustainability transition. Mining can be a grubby business, and companies have had to make capital investments to improve their carbon and pollution metrics.

Cutler believes this spending is now largely behind them, while also creating higher barriers to entry for new mines. This is likely to limit supply.

A final point is that if precious metals companies start to see improving cash flow, they may look to return money to shareholders through dividends and buybacks, or to buy their peers. This could be supportive of share prices across the sector.

A rally from the gold mining companies is a normal response to a rise in the gold price, and it looks as if this is finally starting to happen. It is always possible that this nascent strength could be derailed by weakness in precious metals prices, though it is difficult to see a thawing of geopolitical tensions, or risk aversion disappearing in the short-term.

In the meantime, valuations still leave plenty of wiggle room for mining companies to make progress.

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