Hakan Kaya, senior portfolio manager at Neuberger Berman, said the potential interest rate pivot by the Federal Reserve, caused by the turmoil in the banking and real estate sectors, "could boost the demand for gold investments".
Earlier this month, gold surged to its highest price since August 2020, reaching $2,022 an ounce, while it hit $2,112 in April 2020, in the midst of the pandemic.
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When reported in sterling, however, gold reached an all-time high in March 2023 at £1,649, according to data from the Royal Mint. At the time, the Royal Mint said this was likely due to investors moving to gold as a ‘safe haven' and protecting their portfolios from negative, volatile market conditions.
But Kaya explained central banks' reaction functions are crucial to consider when examining gold.
"Historically, gold prices have risen during periods of increasing rates, such as in the 1970s, when the Fed's focus was on growth over price stability during the war in Vietnam and the implementation of social policies.
"However, during the Volcker Fed in the 1980s, when the focus was solely on reducing inflation, gold prices fell during periods of high and rising rates."
As a result, if the Fed maintains a "balanced approach to inflation and growth", as it is expected to do, Kaya said, there is potential for "significant gains".
Catherine Doyle, investment specialist, multi-asset at Newton Investment Management, agreed that given the current macroeconomic backdrop, gold has the "attraction of cushioning" a multi-asset portfolio against several risks, in particular against the banking crisis.
"This makes it a good insurance policy in times of credit stress such as the recent turbulence experienced in the banking sector," she said.
"In addition, gold cannot be printed at will - the supply of gold is fairly flat and the stock/flow dynamics are quite different from industrial commodities in that annual production is tiny in comparison to the amount of gold in circulation."
As a result, Doyle said the potential of several negative scenarios "justifies gold's role, particularly as it is not significantly correlated with changes in the price of other mainstream asset classes over time".
Not a commodity and not a currency
Gold is a relatively "unique", semi-hybrid asset class, according to Nitesh Shah, head of commodities and macroeconomic research at WisdomTree, considering it is not really a currency nor a commodity, per se.
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Its peculiarities meant there were "many factors that affect the price of gold", which was why several variables have to be considered when forecasting gold prices, he said.
Shah's pricing approach takes changes in the US dollar basket, CPI, nominal yields on ten-year US Treasuries and investor sentiment into consideration, which is currently forecasting "further upside" to gold prices.
"Consensus is looking for inflation to continue to decline (although above central bank target), dollar to depreciate and bond yields to continue to fall," he said.
How to invest
While gold's defensive properties have made it one of the go-to safe havens for periods of market volatility, Rob Morgan, chief investment analyst at Charles Stanley, said the mentality of investors 5% of their portfolios in gold and "hoping it does not do well", clearly exemplifies how it can help "only during a crisis", and can actually be a "drag on performance at all other times".
He explained there are were several ways to invest in gold, and some were more valuable for investors than others.
The first option is to hold individual coins or bars, but they are unlikely to be "viable options" due to storage and insurance requirements.
Another way is to invest via ETFs, as they "are simple and cost-efficient".
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Morgan highlighted the iShares Physical Gold ETF, which aims to follow the gold spot price and benchmarks against the LBMA Gold Price index.
Morgan said: "There are a number of gold ETCs, but this one is worth considering as it among the largest and cheapest. Plus, very importantly, it has a good bid/offer spread to keep trading costs low."
An additional way to add gold exposure is via gold miners, Morgan said.
Although there are concerns relating to rising costs where "any inflationary benefit from a rising bullion price is partly cancelled out", he said there has been "a bit of an uptick lately".
Morgan said when gold miners move, "they move fast" and if investors can "stomach the extra volatility" in their portfolios, they "could give you some more bang for your back".
He pointed to the Blackrock Gold & General fund, which invests in gold and other precious metal-related companies around the world, holding between 50 and 80 companies, most of which are "well established producers of gold, with exposure to the riskiest exploration stocks relatively low compared with some of its peers".
The Blackrock Gold & General fund returned 60.6% over five years and 53.6% over ten, according to data from FE fundinfo. Its performance was below its FTSE Gold Miners benchmark, which delivered 68.25 and 53.7% over five and ten years, respectively.