Investors and Central Banks Moving Back Into Gold

With stocks at all-time highs and global negative-yielding debt over $15 trillion, investors and central banks alike are making a huge shift into physical gold.

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The stock market, viewed by many as being diametrically opposed to gold, is still hitting all-time highs and extending its decade-long bull run. Despite this, the outflow of money from both the private and official sectors suggests that investors are not quite as optimistic regarding equities’ future prospects.

Last year ushered in what many view as a new norm of negative-yielding debt in the form of government bonds, which has since climbed past $15 trillion, the highest figure on record. Central bankers have demonstrated a willingness to keep easing monetary policy after a 2019 that saw a sudden dovish shift by central banks worldwide. And while many sovereign bonds have since dipped into negative territory, along with U.S. Treasuries’ exceptionally weak showings, the appetite for haven assets is tremendous.

According to recent research by J.P. Morgan analysts, investors are becoming more and more concerned in regards to equities and are slowly but surely rebalancing their portfolios. JPM’s analysts noted that global funds have poured a combined $1 trillion into negative-yielding bonds over the past year. Money managers have likewise taken note of gold’s outperformance over the past six months and now hold the highest weighting in gold since 2012, just after the metal hit its all-time high.

Central banks are, by and large, following the same strategy. 2018 and 2019 were record years in terms of purchases from the official sector, as countries around the world bought more than 600 tons of bullion each year, a figure that doubled most previous expectations. Central bankers, however, might have different motives than simply wanting to diversify their portfolio.

Although the U.S. dollar has held steady in its place as the global reserve currency, recent signs suggest that various countries might be looking to either usurp the greenback’s status as the reserve currency or reduce their foreign reserves in case the dollar pulls back significantly. As Barron’s Randall W. Forsyth points out, the inflows into gold from various angles are far from uncorrelated. The loose monetary policies that central banks continue to unravel have artificially inflated the prices of various assets, including stocks and bonds, reigniting existing fears that equity valuations have been overblown for some time.

Regardless of the demand spike, the JPM team thinks that both private and institutional investors remain underexposed to gold and expects them to continue buying up the metal at the same frantic pace. The team also predicts that the strikingly high purchases from central banks will persist due to their low overall allocation to the yellow metal, stating that some nations might be aiming to double their allocation to gold in the near future.

As Forsyth notes, gold is mostly approached as a safety play, as it guarantees that the investor will retain their wealth in the event of an economic crisis. But with gold having gained more than 30% in the span of two years, it would be difficult to overlook the metal’s role as a profit-making asset that can generate returns just as significant as those from much riskier investments.

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