Golden returns in 2024: but is it now too late to profit?

In early December the gold price was up 29% since the start of 2024 in US dollar terms. It had outpaced the share prices of Microsoft Corp (NASDAQ:MSFT), Alphabet Inc Class A (NASDAQ:GOOGL) and Apple Inc (NASDAQ:AAPL), despite having no AI credentials to speak of.

It is perhaps more surprising that this has happened amid circumstances that wouldn’t naturally appear to favour gold – inflation and interest rates are falling, the US dollar has been strong, and there has been plenty of appetite for risk.

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Geopolitics appears to have been the swing factor. Escalating tensions in the Middle East and the war in Ukraine have prompted buying from central banks, particularly those on the wrong side of Russian sanctions.

Robert Burdett, head of multi-manager at Nedgroup Investments, says the seizure of cash deposits and assets from Russia have pushed central banks towards holding reserves in gold - in particular, Turkey, China, Kazakhstan and India. 

It comes at a time when sources of new supply have been limited. Burdett says: “It doesn’t take much change in demand to move the price, with a steady 80%-plus of annual production taken by the jewellery industry. This central bank interest coincides with mining being in the ESG (environmental, social and governance) spotlight and, with higher costs of borrowing, these two factors are limiting the supply of this already scarce commodity.” 

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The burgeoning US deficit may also have played a role in driving demand for gold. The deficit has continued to accelerate over the past 12 months. The US ended its fiscal year 2024 with a $1.83 trillion deficit, the highest outside the Covid-19 period, and its overall deficit is now more than $36 trillion.

At the margins, investors may be growing nervous about the lack of fiscal restraint in the largest economy in the world, sending them towards gold as a safe haven.

It has been a slightly different picture for the gold mining companies. The MSCI ACWI Select Gold Miners IMI Index, a benchmark for the gold mining companies, is up 24% for the year to date (to start of December). This is ahead of the MSCI ACWI return of 20.1%, but it has lagged the gold price and there has been real weakness in some of the mid and smaller-cap miners. Gold mining companies are usually billed as a leveraged play on the bullion price, so this weakness is unexpected.

The year ahead

The trajectory of the gold price from here is more difficult to call. Some cracks have been appearing in recent weeks. The gold price is down from its high of $2,800 in October and is currently trading at $2,678 (as at 10 December). The Gold Miners index is down -4.8% over the past three months compared to rise of 3.9% for the broader MSCI ACWI index.

In November, global gold exchange-traded funds (ETFs) saw their first monthly outflow since April, losing $2.1 billion. This may have been the Trump effect, as investors rushed for “risk-on” options such as Bitcoin, US smaller companies and technology.

Georges Lequime, manager on the WS Amati Strategic Metals fund, says the outlook for gold is “muddy”.

He says: “It shouldn’t have performed as well as it has, but now gold should perform better because interest rates are falling and, after a strong year, equity markets could move to a more ‘risk off’ position.”

He points out that in Trump’s last term, gold initially dropped, but then soared. If Trump’s policies of tariffs, tax cuts and deregulation prove as inflationary as many believe, then it would be a good backdrop for gold. Equally, the assumption is that the US fiscal deficit will continue to expand under Trump. Market nerves around the level of US debt would be good for the gold price.

On the other hand, the price is high. This is its highest level ever, and the price has almost doubled since 2019. While there are plenty of geopolitical factors that would support an allocation to “risk-off” assets such as gold, unless inflation revives significantly, it may be that the price has reached its elastic limit.

Investment options

Where does that leave investors? Burdett says: “The late Julian Baring, self-confessed ‘gold bug’ and founding fund manager of what is now known as the BlackRock Gold and General fund, used to recommend investors hold around 5% of their portfolios in his fund, further advising that if it grows to 10% to sell back to 5%, and if it dips to 3% top it back up to 5%. Not a bad strategy when it comes to any investment, but especially so for this inert but erratically priced metal.”

He says gold is a useful hedge against inflation, but is more likely to help when hyper-inflation is the issue. Gold also has no yield, there are costs associated with safe custody, and it has lagged stocks in the longer term. 

He currently has a position in gold within Nedgroup’s multi-asset portfolios and intends to hold on to it for its favourable supply/demand characteristics, the diversification it offers, and its potential for offsetting geopolitical and inflation risks that would affect other parts of the portfolio. However, he remains below Julian Baring’s recommended allocation for the time being.

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David Coombs, head of multi-asset investments at Rathbones, has been paring back his exposure to the iShares Physical Gold ETC GBP (LSE:SGLN) on recent price spikes.

He says: “Gold is a black box. It has no yield, so is completely at the whim of supply and demand. This demand spans everything from bolstered middle classes in populous nations like India that culturally like gold, to industrial demand for the best non-corrosive conductor on earth, and central banks buying up bullion to show bondholders that they’re good for the money.

“And then there are speculators – or investors – whatever you want to call them. People like us who buy it as a protection against sudden economic shocks.”

Coombs agrees that it is useful to have a small allocation in a portfolio. However, when weighed against its current price, he thinks it is best to take the cash now.

He adds: “Especially as holding it means you go without the going interest rate, which is currently between 4% and 5%. We think it makes sense to hold safe government bonds and take the income.”

Gold remains only lightly used by private client managers. ARC, which aggregate private client portfolio data, shows gold is not a material component of the average portfolio. The latest quarterly ARC Market Sentiment Survey included a question asking each discretionary fund manager what proportion of a “steady growth” investment portfolio would be directly exposed to the gold price. Around 75% of managers had either no gold exposure or less than 2.5%. No manager had an exposure level above 10%. 

Physical versus gold miners

If expert investors aren’t enthusiastic about the gold price, there is more optimism about the potential value in gold mining companies. Lequime says their share prices have not kept pace with the gold price and are now on the “cheapest multiples I’ve seen in my lifetime”.

Lequime says this is particularly evident among the mid- and small-cap mining companies. He adds that liquidity is thin, which has been difficult as share prices are falling, but could mean the market turns quickly if confidence improves.

Funds with exposure to gold mining companies include BlackRock Gold & General, Amati Strategic Metals, or Jupiter Gold & Silver. For braver investors, the VanEck Junior Gold Miners ETF (LSE:GDXJ) offers exposure to the unloved smaller end of the market.

Gold has had a strong run, fuelled by geopolitical tensions. Those tensions have not gone away and may accelerate under a Trump presidency. Any revival in inflation would also support the gold price. However, the price is higher, and expert investors have been backing away. There is still value in the gold miners, however, which have not kept pace with the rising gold price. This may be a more fruitful place for investors in 2025.