Gold demand hits six-month high against uncertain backdrop

With demand on the rise amid Brexit concerns, we weigh up the pros and cons of going for gold.

Gold bullion saw an uptick in demand from private investors in the month of March against the uncertain Brexit backdrop, according to data from BullionVault.

The firm said its Gold Investor index, which measures sentiment based on trading among its 75,000 international and UK users, last month rose by 2.3 points to 54.5, its highest level in six months.

A reading of 50.0 would indicate a perfect balance of net buyers and net sellers across the month. The Gold Investor index peaked at 71.7 when gold prices hit their current all-time highs of just over $1,900 in September 2011.

But, according to Adrian Ash, director of research at BullionVault, it has been European investors, particularly those in Germany, that have been boosting their allocations to gold, rather than UK investors.

He says:

"As a UK business BullionVault is naturally concerned that uncertainty over Brexit could damage its appeal to potential users in Europe. The fact is that eurozone investors are actually raising their allocations to gold using BullionVault, while UK investors are holding back."

Despite the uncertainty over how Brexit will pan out, the FTSE 100 index has put in a strong showing in the first three months of 2019, returning 8.2%. Investors, though, continue to shy away and are adopting a wait and see approach, as prime minster Theresa May and Labour leader Jeremey Corbyn attempt to arrive at a compromise to break the Brexit discount.

Gold: The pros and cons

At times of market stress, often caused by wider economic uncertainties, it makes sense for investors to ensure they are adequately protected, and one way to achieve this is through seeking out investments that are genuinely uncorrelated to the fortunes of equity markets.

The trouble is that investors do not have a great amount of choice, with gold, government bonds and infrastructure being three of the main ports of call.

Of the safe-haven plays, gold is viewed as the standout choice – and particularly at this point, as government bonds offer low yields, while some of the main investment trust routes to access infrastructure are carrying hefty premiums of over 10% for their attractive yields (typically around the 5% mark).  

Over the years the precious metal has proved its value when it comes to protecting portfolios from volatile markets. Indeed, as Ash points out, the gold price has risen in eight of the 10 years since 1970 that the FTSE All Share has lost value on a total returns basis, including each of the five years when the index fell by 10% or more.

Cons take shine off the metal

Against those benefits, though, gold does not have a yield, nor does it generate cash flow or profit. Instead its price simply reflects what the next person is prepared to pay for it, so it tends to be volatile.

Another downside is that the value of the dollar typically has an inverse relationship with the gold price. When the dollar rises, gold becomes more expensive for international investors to buy, because gold is a dollar-denominated commodity. That is why in 2018 gold funds racked up sizeable losses.