This has been a period of turmoil around the world, with inflation soaring and political upheaval with the Russian invasion of Ukraine and the subsequent war.

Gold historically performs well during geopolitical crises and economic uncertainty, says Jason Hollands, managing director of Bestinvest, so the gains seen are nothing surprising.

This is because many investors perceive gold to be a long-term ‘store of value’ as a physical asset. Unlike paper money, supply of the precious metal can’t simply be expanded by decisions of bankers to issue more. It needs to be extracted from the earth and so is relatively finite.

Yet Hollands warns investors to be cautious when buying physical gold for an ISA or pension portfolio.

This is because he says the precious metal is not performing the way it always does when it comes to its relationship with US Treasuries.

Usually as yields on US Treasuries increase, as they have done this year, the price of gold weakens, but that has not happened yet.

In fact, if gold were to be acting as it usually does, the price would be nearer to $1,500 a troy ounce (weight system for precious metals) rather than its current level of $1,953, according to data from Bestinvest.

Historical links between the price of gold and US Treasuries

US Treasuries, or bonds, are seen as one of the safest assets to invest in as not only are they unlikely to be impacted dramatically by other events – such as shocks to the stock market – they also pay a yield so investors receive an income (coupon) from them.

In the past, when yields have risen on US bonds, gold prices have generally weakened. This is because while both are considered safe investments, the benefit of choosing bonds is that an investor will also be paid an income.

But this narrative isn’t playing out the way it always has done.

Since the start of the year, yields on bonds have risen, in part thanks to the US government’s monetary tightening programme which has been launched in response to the soaring inflation levels. At the start of 2022, 10-year Treasuries were yielding 1.51%, but this has now surged to 2.87%.

There hasn’t yet been a subsequent weakening in gold price though, and this could happen.

Western sanctions behind strong gold performance

One of the reasons gold is remaining strong, despite growing yields on US treasuries could be due to Western sanctions against Russia.

A range of sanctions have been placed on Russia’s central bank since the start of the war in Ukraine and its reserves in currencies and bonds held overseas have been frozen. Its gold reserves however, are held in its own vaults.

Hollands explains: “Russia is estimated to be the fifth largest holder of gold reserves globally with an estimated $140 billion in the precious metal and the country is also one of the largest producers – though it is banned from selling bullion on the London market, which is the world’s largest exchange for gold.

“The continued strength in the gold price might therefore be a sign that markets expect other central banks – such as China – to start recycling more of their trade surpluses into gold and less into assets held in the Western financial system in case they are targeted for sanctions in future.”

Investors should take care with gold

The price of gold may start to slow down if yields continue to rise on US Treasuries and investors start to reconsider the benefit of owning income-generating investments, like Treasuries, instead of gold.

Hollands warns that DIY investors should not over-aggressively move into gold based on its short-term performance.

Hollands adds: “Our own view at Bestinvest is that small allocations to gold can prove useful for diversification purposes in an investment portfolio, as it typically behaves differently to equities and bonds.

“It tends to be the panic asset of choice for investors and so in times of high uncertainty and especially when fears brew over the stability of the financial system, investors routinely flood into gold as it is seen as a port in a storm.”