Gold is Not All that Glitters

Thomas Gehlen

Gold, the shiny metal well known for its store of value in times of uncertainty, has rallied almost 15% this year – more than the FTSE 100 and S&P 5001. Indeed, the world has become an increasingly uncertain place, as escalating geopolitical tensions have shown. But, looking at other sentiment indicators, this has not been affecting financial markets too much. In fact, many analysts are unclear why gold prices have shot through the roof in recent months. 

This raises the question: why trust gold as “store of value” when its price drivers are so unclear?

A commodity like any other?

Like other commodities, gold is not a “productive asset”: it doesn’t generate any income the way stocks or rental units do; in fact, storing physical holdings actually costs money on an ongoing basis. The only way to profit from gold is to sell it at a higher price than it was purchased at.

Unlike many other commodities, however, gold is not “consumed”, either. Oil, copper, or cobalt may benefit from surging demand in times of strong economic growth driving up prices. Industrial use of the precious metal is limited, and the supply required for products such as jewellery is comparatively modest.

Given its lack of fundamentals, gold may well be classed together with other assets typically seen as speculative, such as classic cars or bitcoin.

What makes gold so special?

Despite transcending rational analysis, the appeal of gold as a store of value is deeply ingrained in human psychology. The metal has been symbolising wealth for millennia, outlasting empires and economic crises in a way no other asset has. This belief endures today: in times of uncertainty, investors rush to gold, the combined force of their sentiment driving up prices despite the lack of any immediate fundamental reason. In a diversified portfolio, this could potentially offset losses in risk assets that often react negatively to uncertainty, such as equities. 

This could partly explain the metal’s recent appeal: Chinese investors turned to gold due to their struggling local stock market and property crisis. In the coming months, investors in the US may choose to hedge the effects of political instability induced by a potential second Trump presidency, which could provide a similar support for gold prices.

But there are risks. These bouts of sentiment are notoriously hard to forecast. In the absence of any catalysts, gold prices can stay comparatively flat for years at a time, as they did for two decades from 1981 until 20052. This is particularly dangerous for an asset that is not generating any income: consumer prices rose by 118% in the UK over the same period3. Any gold holding would be worth only half of its initial value in real terms by the end of it. Not so much a store of value now!

Gilts, not gold

In the modern economy, investors have increasingly turned to government bonds as diversifier in times of uncertainty. Developed market sovereign bonds are considered one of the safest investment available, backed by the full faith and credit of the issuing government – a faith that is increasingly challenged, but still fundamentally true, as we laid out in a previous edition of the SGKH Market Focus.

Similar to gold, the mere status of government bonds as a “safe haven asset” causes investors to turn to it in volatile times. But there is more: because they are income-bearing assets, their value is to some degree tied to the interest rates set by central banks. When central banks sense impending economic distress, they may opt to cut rates to support the economy by offering cheaper access to lending. When they do, existing bonds look more attractive, and their capital value rises accordingly (bond prices move in the opposite direction of interest rates). This presents a fundamental – rather than just sentimental – driver of prices in response to rising uncertainty.

The opposite is also true: when central banks raise interest rates, the capital value of government bonds falls. This was painfully evident in 2022, when the pace and magnitude of rate “hikes” took markets by surprise, and bond indices fell by almost 25%4 – the biggest loss in decades.

Bottom Line

Gold can have its place in a diversified multi-asset portfolio. But its lack of income and fundamental drivers can make it unpredictable and costly to hold in the long run. As interest rates have returned to more traditional levels, this cost is now particularly evident. Government bonds have again emerged as most attractive “safe haven” asset. They actually respond to fundamental – rather than just sentimental – drivers. And they’re providing income at the same time!


1 Source: Bloomberg

2 Source: Bloomberg

3 Source: UK Office for National Statistics

4 Source: Bloomberg


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