Gold price upside
Gold has performed well recently, up 15.4% this calendar year. Gold tends to benefit from economic stimulus because it is widely viewed as a hedge against inflation and currency debasement. It is also widely viewed as a hedge to serious economic, financial, and geopolitical risks in the global economy. The post GFC quantitative easing programs helped drive long term interest rates lower and gold higher, leading to a gold price of over $1,800 in late 2011 – an all-time high.

Gold prices are highly correlated to central bank accommodation
Historical relationship between the gold price and treasury yeilds
Gold prices are highly correlated to central bank accommodation

Currently, policymakers are moving towards a whatever it takes mentality to reviving inflation. As such, real interest rates should remain low (or negative) as quantitative easing continues to depress bond yields and inflation starts to move higher. That environment would be very supportive for gold prices, and as such, we believe there may be further upside.

BCA Research, our key partner for macro-economic analysis, last week raised their view on gold to “a strategic holding”. On top of the above rationale for owning gold, BCA note that in the long term, gold prices could also benefit from stimulative policies to boost EM income growth and the reversal in globalisation and demographic trends that will become inflationary rather than deflationary. BCA note that investors have already increased their gold holdings, although as a proportion of equity market value, investor holdings in gold remain below the previous peak.

Gold investor holdings have increased but have scope to go further
The level of gold holdings as investment, as a share of equity markets

Recent investor purchases have driven gold to a level that may be over bought in the short term, and as such, BCA state they would look to build a long term position on weakness rather than conducting large amounts of buying at today’s prices.