Gold has no cash flow, no major use in industry and there’s a fair amount of it on this earth. So why buy it?
A good question, but plenty of people are.
In recent days rising demand has pushed the yellow metal towards its record of US$2,075 an ounce. Over the past six months, it has climbed from US$1,710 an ounce to a high of US$2,048. This morning it was trading at US$2,038.
Gold is “that rare thing, an uncorrelated anti-stagflation hedge,” said BofA Global Research in a report entitled The new case for gold.
For years the precious metal has been seen as a safe haven in global economic turmoil. But these days when corporate profits are falling, inflation remains high and major currencies are losing value it is looking especially attractive, argue the strategists.
“The shift from a 2 per cent world to a 5 per cent world means structurally higher inflation and interest rates, and gold is one of the few assets with no correlation to stocks (-0.01 per cent) that is also robust against stagflation,” they wrote.
That makes it “best of breed” for portfolio diversification.
That’s especially true because the old ways of diversifying aren’t working as well anymore, they said. Thirty years ago S&P 500 stocks were only about 10 per cent correlated. Now with a few growth stocks dominating the market, intra-index stock correlations are often more than 50 per cent.
Gold prices have been heading higher as investors pile in, worried about slowing economies, rising credit stress and geopolitical risks. Central banks are big buyers and in 2022, their appetite for gold rose 150 per cent, reaching a 55-year high.
“If central banks keep buying and flows increase into gold ETFs, gold’s rally should extend,” said the strategists.
Another driver of demand is fears about the U.S. dollar. Investors have become increasing worried about the staying power of the greenback which faces pressures from global competition and rising debt burdens.
Meanwhile, the chance of a potential headwind for gold, Federal Reserve rate hikes, is fading. Markets now see a 86.9 per cent chance that the Fed will hold in June, but inflation data out tomorrow could change that outlook.
How high will gold go?
Bullish BofA strategists are predicting a price of US$2,200 an ounce by the fourth quarter of this year. Their technical analysis backs that up and suggests prices could reach as high as $2,543.
How much gold should you buy?
Starting with a conventional 60/40 portfolio, BofA says investors can improve returns by taking equally from stocks and bonds and putting 25 per cent in gold.
During past turmoil such as the dotcom bubble, great financial crisis and the COVID pandemic, a portfolio that held 25 per cent gold cut losses by 9 per cent on average, they said.
How to buy gold
BofA favours gold ETFs over gold mining ETFs, which they say offer lower returns and less diversification.
They are initiating coverage of five gold ETFs, and their top picks are SPDR Gold Mini Shares Trust and iShares Gold Trust Micro, which they say have lower expenses than their peers and the same fundamentals.