Nervous investors have bought more than 1,000 tonnes of gold this year, a record figure equivalent to the entire hoard the Swiss National Bank has stashed away in its vaults.
For centuries people have considered gold a store of value in turbulent times. In 2020 they have been buying it in droves.
Gold exchange traded funds (ETFs) recorded their tenth consecutive month of positive inflows in September for only the third time since the financial crisis. This was despite gold experiencing its biggest monthly price drop since November 2016, falling 3.6%, after reaching a new all-time high in August.
With concerns mounting about the outcome of the upcoming U.S. election and a second wave of coronavirus infections, will the precious metal retain its lustre in the fourth quarter?
Investors certainly believe so. Figures this week from the World Gold Council (WGC) show globally, they have poured $55.7 billion into gold ETFs this year. ETF managers have had to buy 1,003 tonnes of the metal to meet rising demand, smashing the 2009 peak of 646 tonnes and taking inventories up to a record 3,880 tonnes or $235 billion.
This wall of money helped push the gold price up to a new high of $2,075 an ounce in early August. Despite the pullback in September, the yellow metal ended the third quarter up 6%, its eighth straight quarter of price gains. Gold is now up more than 20% this year, way ahead of the S&P 500’s gains.
The WGC believes last month’s price fall was “likely tactical in nature”, resulting mainly from profit-taking and rebalancing around the quarter-end.
Global investors still increased their gold exposure by 7%, or $4.6 billion, overall in September.
Anxious American investors have been the biggest recent buyers. They pumped $2.2 billion into gold ETFs last month and have now shifted a total of $35.9 billion into the metal this year, accounting for two-thirds of total global inflows.
The bulls are on the charge
Whether viewing gold as a safe haven or a tactical play, the bulls point to a number of factors being supportive of higher prices. Political uncertainty abounds after President Trump’s repeated refusals to promise he will honor the result of the upcoming election.
One thing he does look set to agree on is a further financial stimulus package, after earlier abandoning talks with Democrats this week. And it could well end up larger than the measures originally proposed.
The Stimulus Bill will bring a bit of a feelgood factor back to the flagging economic recovery. But the cash drop will also put further pressure on the already weak dollar and be inflationary. Both of which will be positive for the gold price.
Core CPI, which strips out the effect of volatile gas and food prices, rose at an annualized 1.7% in August. This was the highest rate since the pandemic began and the first reading since the Federal Reserve last month announced it no longer pre-emptively raise interest rates to nullify inflation.
The European Central Bank has similarly said it will be more relaxed about letting inflation rise above target, meaning rates are likely to be anchored lower for longer. Particularly if Covid-19 sparks another spate of damaging lockdowns.
The gold price has rebounded back above $1,920 this week from the lows of the $1,870s in September and many analysts are backing it to rise further.
Ole Hansen, head of commodity strategy at Saxo Bank, said: “Following a year where gold is up more than 20%, it is a bold call to look for further gains. However, the powerful combination of rock bottom rates, rising demand for inflation hedges and the potential for a weaker dollar all point to further gains,” he said.
“Following a prolonged period of consolidation around and mostly above $1920/oz, we see gold eventually moving higher to finish the year at or near $2000/oz.”
UBS is also predicting $2,000 by the year-end, with Goldman Sachs more bullish, setting a $2,300 target. JP Morgan forecasts any break above $2,000 to be shortlived, however, predicting an average price of $1,880 in the fourth quarter.
The bulls are certainly out in force, but the upside in absolute terms does look limited. But in an uncertain world, gold’s safe haven status and diversification benefits are where the real value is.