Welcome to the new morningstar.co.uk! Learn more about the changes and how our new features help your investing success.

Investors Warned: Don't Buy Gold for Gains

Demand for gold remains high after the Brexit vote, but experts warn investors should not buy gold for gains, instead it should be an asset diversifier

Karen Kwok 4 August, 2016 | 12:01AM

The price of gold has climbed 34% this year – and the number of investors buying gold keeps rising with it. But investors have today been warned not buy gold in the hope of greater returns. Instead the yellow metal should be held as insurance against a market crisis, according to Adrian Ash, head of research at BullionVault, the online bullion dealers.

Gold price rose sharply to hit a three year high in the wake of the Brexit vote in late June, hitting $1372 per ounce on July 6. This is 28% short of the all-time high of $1,895 in July 2011, when the Eurozone debt crisis loomed.

Investors’ views of gold remain positive. According to Lloyds Bank Investor Sentiment Index, UK investors’ sentiment towards gold rose from 38% in June to 54% in July – meaning they think the precious metal has further to climb. The latest data from BullionVault revealed that number of investors buying gold in July reached the highest level since April 2013. In the UK, the number of new investors buying gold for the first time using BullionVault also stood 87% higher than the previous 12-month average in July.

“The current price target for gold; this is not how the gold market typically works,” Ash told Morningstar in London, adding that historical data proved it is “wise” to buy gold as a protection.

“Owning gold alongside shares and bonds consistently reduced risk and smoothed returns for UK investors over the last 40 years.”

“Moving just 10% of a typical portfolio into gold would have nearly halved your losses in 2008 when Leman Brothers collapsed. When the Dot Com Bubble peaked and burst in the five years from 1999 to 2004, holding 25% gold would have more than doubled a standard portfolio's total returns,” Ash explained.

Suzanne Hutchins, portfolio manager at Newton Investment Management agrees, arguing that as nation states continue to hold gold as part of their reserves as long-term financial insurance, “it is reasonable to us to do the same”.

However, Samy Chaar, investment strategist at Lombard Odier expressed his concern over the risk of increasing gold holdings now.

“Despite current investor appetite for the commodity, we would not recommend adding more exposure, as the downside risks seem larger than the upside potential,” Chaar said, saying he expects prices to range between $1200-1400 per ounce over the coming months with market fears and Federal Reserve repricing.

Will Central Bank Policy Continue to Drive Gold Price?

Ash believed that the Bank of England’s interest rate decision would not affect much of the price move on the global gold market; however the US election in November will be a concern to affect the gold price.

"After the Brexit shock in June, the continued surge in bullion demand suggests that November's race for the White House is becoming a clear concern,” Ash said.

Fundamentally a nation’s politics should not affect gold price as gold only moves on fiscal policies, he added. But as the US election becomes so important for the broad fiscal outlook, they have the ability to move the money around.

“The more desperate that central bankers become to juice growth and inflation, the more they succeed in minting new gold and silver buyers amongst household savers,” Ash said.

Chaar agreed that US dollar flucutations and interest rates are the most stable drivers of gold over the long run, saying “taking a position on gold today means taking a very bearish view on the Fed”. He added that the likelihood of a US central bank’s interest rate rise by the end of the year should not be underestimated, and this dynamic could lead to a marked sell-off in gold, similar to those experienced in November 2015, which dropped 10% in gold prices.

The gold price was $1352 per ounce at 11am London time.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk

Audience Confirmation


By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites