Since the beginning of the year, gold prices have risen by nearly 40%, outpacing every major developed market equity index – even the S&P 500.
Since the beginning of the year, gold prices have risen by nearly 40%, outpacing every major developed market equity index – even the S&P 500. This is a very strong performance in such a short space of time, and investors are understandably sceptical about the potential for future gains. At UBP, we maintain a highly constructive stance on gold, and we think that over the coming years it will rise to levels above USD 3,000 per oz. There are several reasons for this stance.
First, we note that advanced economy governments continue to run huge budget deficits, on top of already elevated debt levels. Such an elevated stock and flow of debt has rarely been seen before, and it is likely to result in higher levels of trend inflation, thus supporting further upside for gold.
Second, geopolitical risks remain elevated, and this will be a persistent issue over the longer term. These geopolitical concerns have already resulted in emerging market central banks increasing their gold reserves substantially, and we think that this will continue to support gold prices over the coming years. We note that while institutional investors are already heavily invested, inflows towards retail-focused ETFs have increased over the last five months, which indicates that retail investors are increasing their allocations towards the yellow metal. Last, we note that demand for physical gold has increased notably, particularly from both Chinese and Indian consumers. We think that these trends will be sustained coming into 2025.
We think precious metals are worth integrating into a portfolio, with the size of any allocation ultimately depending on an investor’s underlying asset allocation, as well as the current economic context.
There are several methods of gaining exposure to gold; investors can, for example, simply purchase physical coins or bars. However, large quantities may require storage, where costs can vary significantly depending on the location. Entry and exit charges should also be considered for physical bars. Investors looking for greater levels of liquidity and lower charges can consider investments in gold-backed ETFs, which have the advantage of offering instant liquidity and very low management charges. Investors can purchase financial gold (XAU), which is also highly liquid and has very low transaction costs and XAU can be bought against any of the major currencies. Sophisticated investors may consider investments in over the counter (OTC) options on XAU, which can add significant leverage for limited potential downside. Last, investors may also consider investments in gold futures, which also benefit from abundant liquidity. Transaction charges are reasonable; however, rollover charges between contract periods can be significant, thus detracting from performance.
