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Gold price soars – is now the time to buy?

Emma Lunn
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Emma Lunn

The price of gold has climbed to £1,576 an ounce, just shy of the £1,580 record high in sterling terms reached in March 2022.

Gold has been rising sharply in dollar terms in the last few months too, but still sits 6% lower than its peak level of August 2020. Gold is currently trading at $1,940 an ounce, up from $1,660 since the end of September 2022.

The price of gold has gone up in recent months due to a weakening dollar, the reopening of China, and a slowing global economy. 

A ‘golden cross’ has appeared on the technical charts. This happens when a short-term moving average of prices, usually 50 days, rises above a long-term moving average, usually 200 days. A golden cross is often used by technical traders as a buying signal.

Laith Khalaf, head of investment analysis at AJ Bell, said one reason gold is going up in price is the effect of a weakening dollar

“Gold and the dollar are inversely correlated with each other, not least because the precious metal is priced and traded in the US currency. The dollar has fallen against a trade-weighted basket of currencies by around 10% since its peak in September, and that helps to explain why gold has risen by around 15% in dollar terms over the same period,” he explained.

“There is some expectation that the dollar will continue to weaken from its recent peak, with many anticipating that the Federal Reserve will continue to slow its tightening of monetary policy throughout 2023, and taking this as a bullish signal for gold. Notwithstanding the extremely unpredictable nature of currencies, UK investors need to be a bit wary here because if the dollar is falling against a broad basket of global currencies, that’s likely to include the pound,” Khalaf said.

Since the end of September, the price of gold has risen by around 15% in dollar terms, but by just 3% in sterling terms, as the US currency has weakened against the pound over this period. 

So UK investors have not enjoyed the full force of the recent rally because of adverse currency movements. A further fall in the US dollar may boost the dollar price of gold, but this may not feed its way cleanly into gains for UK investors in pounds and pence.

How safe is gold?

Gold is often seen as a safe haven, but investors also need to be careful not to equate this with price stability. 

“People do tend to flock to the precious metal in terms of financial stress, but it shouldn’t be taken as read that gold isn’t volatile. It is, and steep losses can be incurred. Between 1980 and 1982, the gold price fell by over 60%, and between 2011 and 2015, it fell by around 45%,” Khalaf said, “While gold traders often think in just days or weeks, everyday investors usually want an asset they can hold for years, and the long-term case for gold is more nuanced.”

While shares in companies produce cashflows generated from economic activity, gold doesn’t produce cashflows and has few industrial uses, with demand mostly coming from jewellery manufacturers and investment. This means it’s more difficult to pin an intrinsic value on gold.

“Consequently, the long term direction of gold is pretty difficult to gauge because with no cash flows to speak of, sentiment will play a larger part in pricing,” Khalaf said. He added: “From its peak in 1980, the gold price fell by 33% over the next 20 years, and it took 27 years for gold to reach its former high. That’s a long period in the wilderness.”

Should investors buy gold now?

The value of gold largely lies in its ability to act as a diversification in a portfolio because it behaves differently to other assets, especially equities. 

If you’re a conservative investor, you might therefore hold bonds and gold alongside equities because they will tend to perform well at different times. 

But Khalaf warned that gold isn’t “the shortcut to riches those who are trading the ‘golden cross’ might believe” and as the historical returns clearly show, gold does come with significant risks attached, especially when it is already trading near record highs. 

Khalaf suggests that investors who wish to hold gold should only do so as a relatively small portion of their portfolio, as a bit of diversification alongside more mainstream assets. 

“Thanks to the arrival of ETCs (Exchange Traded Commodities), gold is now easily tradeable at the push of a button and these funds can be held within SIPPs and ISAs to protect profits from Capital Gains Tax,” he explained.

“Most investors should stick to physically backed ETCs such as iShares Physical Gold ETC.”

Related: Gold set to shine in 2023: Five investing mistakes to avoid