Gold prices have seen a remarkable surge of around 30 per cent since the fall of 2023, marked by several spikes that are not easily attributed to specific events or fundamentals.
According to European investment manager Amundi, a combination of factors has contributed to this surge.
Vincent Mortier, Group Chief Investment Officer at Amundi, suggests the rise in gold prices could signal a transition to a new phase of the economic cycle, one that may differ from the post-GFC era.
Mortier notes that markets are currently assessing when central banks will begin cutting rates, with ongoing uncertainty about the pace of disinflation.
Despite expectations of elevated rates for a while longer, the surging gold price suggests a disagreement with this assessment.
Mortier outlines several factors driving the demand for gold.
These include the expectation of structurally higher interest rates, a shallow ‘repair phase’ in the absence of serious economic dislocations, and uncertainties surrounding global trade expansion led by China.
Additionally, concerns about medium-term inflation equilibrium, geopolitical risks, and domestic instability are prompting investors to rethink portfolio diversification, with gold emerging as a favoured hedge.
Mortier highlights seven reasons why gold should be considered for a diversified portfolio:
- Liquidity with Limited Counterparty Risk: Gold markets offer liquidity with limited counterparty risk, whether through physical bullion, exchange-traded products, or derivatives.
- Attractive Diversification Tool: Gold serves as an attractive diversifying tool, especially in an environment where traditional diversification methods are less effective.
- Protection Against a Wide Range of Risks: Gold offers protection against various risks, regardless of their nature, location, or timing, making it a valuable insurance and investment vehicle.
- Insurance and Investment: Gold serves as both an insurance against risks and an investment vehicle, with inflation-adjusted prices still below past highs and under-owned in diversified allocations.
- Mitigation Against Fiat Currency Exposure: As investors increase their bond allocation, gold can mitigate exposure to fiat currencies, particularly for non-dollar portfolios.
- Attractive Relative to Mainstream Assets: Gold appears attractive relative to mainstream assets, many of which are currently priced for perfection.
- Deserving of Portfolio Allocation: Given its benefits in diversification and hedging, Mortier suggests a 5-10 per cent allocation for gold within a globally diversified portfolio.
Amidst these factors, Mortier forecasts a medium-term equilibrium for gold around $2,500/oz, suggesting further upside potential.