Gold has been one of this year’s top-performing asset classes. But where might it head from here?

There’s no doubt about it: the pandemic has had a massive impact on the value of gold. Conditions were beneficial for gold investments well before the coronavirus crisis disrupted our daily lives, but Covid-19 – and all that it brought with it – has had the effect of turbocharging the precious metal’s global performance. Since hitting a high of US$2,075 an ounce in early August, and thereafter retreating somewhat, there has been no shortage of speculation about where it might go from here.

The fundamentals that underpinned its stellar performance are unchanged. Rock-bottom interest rates in many regions and unprecedented economic stimulus from governments and central banks have stoked worries of inflation, which plays to gold’s strengths. Adding to its appeal as a store of value is the continuing uncertainty caused by the Covid-19 pandemic.

As Mike Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota in the US, warned back in May: “The idea that this is going to be done soon defies microbiology.”

Such times favour a safe haven asset such as gold. “Gold is becoming attractive in this environment where uncertainty is very high, growth is expected to weaken, and at the same time you have negative real rates which make gold attractive to hold as a diversifier in investor portfolios,” UBS investment bank strategist Joni Teves commented as lockdown gripped.

The number of asset managers joining its fan club, managing the economic and financial risks inflicted by the pandemic with an increased allocation to the precious metal, suggests that many think gold has still further to run. Some of these investors such as Pimco come from unexpected corners of the industry. It manages US$1.9tr in assets and has not hitherto been known as a fan of gold.

Pimco’s asset allocation specialist Geraldine Sundstrom said recently: “We need to diversify our diversifier and look for a safe haven beyond government bonds. Given Pimco’s view that rates will be kept very low for years to come causing depressed levels of real yield, gold feels like an appropriate diversifier.”

As the World Gold Council’s head of research Juan Carlo Artigas observes, one or two classic objections have fallen away. “The idea that gold incurs an opportunity cost because of its lack of yield doesn’t apply with bond rates so low,” he says.

So, what next for gold? Answering that question depends on how you expect the world’s economies to recover.

RWC Partners portfolio manager Charles Crowson, who manages a defensive growth fund, says he expects deflation followed by inflation over the next five years or so. But he sees gold as well placed to mitigate such a scenario. “In short, gold can react well in a deflationary environment – and in fact it has done very well lately – but it can also outperform, as we transition from a deflationary to an inflationary period,” he explains.

Bank of America Merrill Lynch, as well as Goldman Sachs and other major banks, has been bullish on gold. In August, it said it expected the gold price to hit US$3,000 an ounce in 2022, given persistent negative real interest rates, inflationary pressures and US dollar weakness.

Reflecting the tide of opinion, the Swiss private bank Lombard Odier has adapted its strategic approach to create dedicated exposure to gold for its clients. Its chief investment officer, Stéphane Monier, noted recently that the outlook for gold depended on the continued shift from physical consumption to financial demand from investors.

“If, as we fully expect, the low-to-negative yield environment persists in line with sluggish post-pandemic global growth, this financial demand will likely offset the weak consumer demand for gold,” he said.

James Steel, chief precious metals analyst with HSBC, expects gold to be well supported into 2021 on the back of “the perceived need for a ‘safe haven’, even in the event of economic recovery”.

Then, of course, there is the US presidential election to throw into the mix. That means more uncertainty as we wait for a definitive result, but Peter Grosskopf, CEO of Toronto-based Sprott Inc, an asset manager specialising in precious metals, thinks gold could get an added boost from a Democrat victory. If elected, some expect Joe Biden to raise taxes and increase spending. “Equities will look relatively less attractive and the deficit will continue to spiral even higher,” says Grosskopf. “Gold tracks well against that as a hedge.”

But back to the uncertain economic outlook. Speaking this summer, Artigas noted that, “Expectations of a V-shaped recovery are morphing into the idea of a U-shaped recovery, or more likely a W-shaped recovery. But, of course, we just don’t know.”

Nobody knows, so the World Gold Council prefers to apply methodology to the matter. It won’t forecast the price of gold, but its web-based quantitative tool Qaurum can model any number of scenarios to see how the precious metal might behave.

Its mid-year modelling of four scenarios provided by Oxford Economics – from swift recovery to deep recession – indicates that higher risk and uncertainty combined with lower opportunity cost are likely to support gold investment demand through 2020. Thereafter, gold’s behaviour might depend on the speed of the recovery and the duration of monetary policy and fiscal stimuli.

Whichever way you look at the picture, the kind of good news that might promote risk-on investing, thus reining back gold’s performance, is in palpably short supply.