Gold rally has legs to run further

The world economy is changing towards a greater acceptance of inflationary outcomes against a backdrop of high global debt, according to Schroder


THE price surge of gold should not be a concern and the currency debasement could see gold and gold-related equity prices run a lot further, according to Schroder Investment Management Ltd.

In a note recently, the investment firm believes the world economy is moving through a “major epoch change” in macro policy towards a greater acceptance of inflationary outcomes against a backdrop of high global debt.

“The result is likely to be more deeply negative real interest rates and greater risk of broad currency debasement. In this environment, continued increases in gold allocations could have extraordinary impacts on aggregate private gold holdings.

“We don’t see why gold prices should be somehow capped at current levels at all in such an environment,” Schroder stated.

The price of the metal reached its all-time high of US$1,980 (RM8,395) an oz last week.

Gold-related stocks also saw an uptick in recent weeks as investors jumped on the thematic following its high price.

Stocks such as Tomei Consolidated Bhd, Poh Kong Holdings Bhd, Niche Capital Emas Holdings Bhd and Bahvest Resources Bhd took some of the limelight of glovemakers last week as the precious metal’s price inched ever higher.

Schroders head of commodities Mark Lacey and fund manager for metals James Luck said based on history, gold bull markets tend to end in sharp moves upwards, virtually in a straight line.

In 2011 for example, gold surged around 15% in the month before the peak and only ever traded above US$1,800 for 19 days. The peak average annual price was actually in 2012 at US$1,669, well below current levels.

In 1981, gold prices moved 80% between December 1979 and January 1980, an even more aggressive parabolic move.

“We came up with a checklist of warning signs to help us and other investors gauge whether gold is already in some kind of dangerous bubble phase. The result is that we find very obvious differences between now and 2011,” they said.

Lacey and Luck observed that one area where momentum has been clearly aggressive is in the buying of physical gold by exchange-traded funds (ETFs), the standout area of demand growth in 2020.

According to published data, 643 tonnes have been added to physical gold ETFs so far this year, compared to 372 tonnes added in all of 2019. 2009 saw a record annual increase of 665 tonnes.

Since the US Federal Reserve effectively declared in April that it would do “whatever it takes” to keep the economy from collapsing, ETF holdings of gold have risen 72 out of 79 days.

Does the ETF holdings (3,200 metric tonnes in total or 104 million oz) represent an unsustainable bubble?

Lacey and Luck ruled this out following in an era of truly gargantuan global liquidity creation and highly elevated financial asset valuations, what really matters is how large these holdings are on a relative basis.