Gold has had a great year. Spot prices hit another all-time high (30 October) of $2,781 per ounce, based on Bloomberg data, chalking up 35% gains so far in 2024, having broken through the $2,600 level in September for the very first time.

That trumps global equities, based on the FTSE World Index’s 18% returns, and even high-flying tech firms have struggled to keep pace, based on the 27% year-to-date gains of the Nasdaq Composite.

How you react to this news is arguably indicative of your psychological type, say analysts at investment trust research house Kepler. Some will see this year’s gold price rally as outlier returns destined to regress to the mean. As AJ Bell’s Dan Coatsworth noted in Shares in August, the price of gold has a reputation for going through spurts. ‘Over the past five years it has jumped, then pulled back, and then jumped again, on repeat.’

Others will be wondering if there remains more to come from gold. ‘We would expect most people to be more of this persuasion, and inclined to jump on what is going up,’ says Kepler analyst Thomas McMahan. It is, after all, a basic human instinct to seek security in numbers and ‘averaging’ can be a powerful factor in decision making, as economics Nobel Prize winning psychologist Mark Kahneman noted in his book, Thinking, Fast and Slow.  

‘It is genuinely difficult to put sentiment and emotions away when deciding how to handle assets that are on a tear,’ says Kepler’s McMahan. This is perhaps a key reason why so few active fund managers have been overweight Nvidia (NVDA:NASDAQ), the analyst posits. ‘This has been a fundamentally wrong decision since at least January 2022, when Nvidia was trading at $15 a share.’ If investing is about making money, then underweighting Nvidia, now at $139, ‘after it had doubled, and after it had quadrupled, was wrong, wrong, wrong,’ he says.

So, are investors also wrong to avoid gold after its 40% rally over the past 12 months?

WHAT’S BEEN DRIVING THE GOLD PRICE?

This year’s gains for the precious metal are largely credited to ongoing economic uncertainty, geopolitical tensions, an unpredictable race for the White House and, strong demand from central banks around the world.

‘Many analysts have attributed this year’s gold rally to central bank gold-buying activity,’ says Nitesh Shah, head of commodities and macroeconomic research at ETFs provider WisdomTree. He points to data from the World Gold Council that shows gold buying in the first half of 2024 was the highest on record, when central banks bought 483 tonnes of gold.

That said, IMF (International Monetary Fund) data indicates that net gold purchases slowed to just eight tonnes in August, the lowest since March, while China, the world’s largest gold buyer last year, has reported zero new purchases for the past five months, according to Reuters, as Chinese authorities signalled another round of monetary and fiscal stimulus, boosting equity markets.

Despite this, gold had still rallied, chalking up new records in August, September and now October. Which makes Wisdomtree’s observation that ordinary households have started buying gold again. ‘Investors have come back into gold ETCs (exchange-traded commodities) after close to two years of selling between the May 2022 and May 2024,’ says Shah.

‘Since May 2024, there have been approximately three million troy ounces of flows into ETCs (a 3.7% increase), worth $7.8 billion. In 2022, gold was competing with a bond market that was getting increasingly cheaper with yields rising. At the time many investors were ignoring the strength in gold prices and opted for the bond market for anti-fragile/defensive exposures.

‘Now that we are back to a rate cutting environment, bonds yields have fallen, and investors are ready to buy gold again.’

WHY DO PEOPLE BUY GOLD?

Gold can act as a haven asset, a financial teddy bear investors cling to in times of crisis. When the world seems uncertain, its timeless and immutable nature has greater appeal. That’s because gold has a special status as an important hedge against inflation, a historic store of value and an ‘independent’ currency that cannot be debased.

Paper currencies lose their value over time as more money is created. Yet the supply of gold and other precious metals is strictly limited, and expensive investment is necessary to discover and extract more. They can therefore act as a diversifier for those with broad portfolios who want to add something different that isn’t necessarily correlated to the prices of other assets.

But while gold is seen as a form of protection for investors, it still competes with other investment assets. ‘When interest rates are high and rising, many investors sell gold – which pays no interest – and buy assets that do,’ says Rob Morgan, chief market analyst at broker Charles Stanley.

‘During such times, higher yields available in bonds, property or shares might represent more appealing options, as do higher interest rates on cash. However, as investors anticipate interest rate falls there tends to be a better environment for bullion.’

There are also concerns of a more inflationary environment, especially if Donald Trump wins the US election. His policies of reshoring and tariffs could stoke price rises in the world’s most important economy, and this has driven some investors to increasingly prize monetary safe havens.

THE LAST SAFE HAVEN STANDING

If trends continue, analysts see a bright 2025 for gold. ‘Gold looks to be the last “safe haven” asset standing, incentivising traders, including central banks to increase exposure,’ says Bank of America’s commodity strategist Michael Widmer.

‘The Committee for a Responsible Federal Budget notes that the national debt is projected to reach a new record high as a share of the economy only three years from now, well within the next presidential term, pushing up interest rate payments as a share of GDP (gross domestic product). In turn, this makes gold an attractive asset, so we reaffirm our $3,000 per ounce target,’ says Widmer.

That tallies with the World Gold Council, Commonwealth Bank, Citi and Macquarie estimates, while Goldman Sachs recently raised its 2025 gold price target from $2,700 to $2,900. HSBC is less bullish, with a range spread from $2,950 all the way down to $2,350.

OPTIONS FOR GOLD INVESTORS

And there are other gold price sceptics. According to Kepler’s McMahon, Duncan McInnes and Jasmine Yeo, managers of Ruffer Investment Company (RICA) sold their physical gold holdings this year, although they reallocated some of the cash in gold miners instead.

They argue that the miners are cheap in relation to the gold price and offer exposure to some of the same trends as the metal but with less downside, given their valuations. ‘This move has paid off in recent months, as gold miners have finally started to do well,’ says McMahon.

Rob Crayfourd, one of the managers of investment trust Golden Prospect Precious Metals (GPM), agrees that gold miners may be a better bet that the precious metal itself next year due to operating leverage, a concept he explained on an episode of the AJ Bell Money & Markets podcast.

‘We should see higher revenues translating into better margins and better free cash flow generation,’ he said. ‘Ultimately, that is what drives the miners. They are driven by earnings, not just the headline gold price.’

For example, Barrick Gold (GOLD:NYSE), one of the world’s biggest gold producers, has enjoyed a 40% share price rally since February 2024. Yet its stock still trades on a multi-year low price to earnings valuation metric of 11.4, according to Stockopedia.

That’s a huge discount to the 40 times earnings level of 2016 as the gold mining industry’s grapple with soaring increases in the cost of things like energy, steel, acid, and labour wash through.

Maybe, mining stock picking is not for you, perhaps you are one of those gold investors who prefer to buy coins or bars, but this is unlikely to be a viable option for most people due to storage and insurance requirements. Fortunately, there are convenient ways to add gold to a portfolio through exchange traded products or ETCs.

These include iShares Physical Gold (IGLN), Invesco Physical Gold (SGLD) and Amundi Physical Gold (GLDD), which are among some of the largest and cheapest ETCs available.

Or there’s the £4.47 billion Xtrackers IE Physical Gold (XGDU) pitched by Shares as one of our investment Great Ideas back in April at $35.61. It comes with a market leading 0.11% ongoing charge and has risen 20% to $42.88 since our story.

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Steven Frazer) and the editor (Tom Sieber) own shares in AJ Bell.

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