Gold prices have increased in August, recovering from a lacklustre performance over the last few years, after market volatility ramped up.
While gold hasn’t been rising in tough periods as many investors would expect, it does appear that investors have been buying into the commodity this month, following a positive 3.35 per cent return from the S&P GSCI Gold Spot index.
Performance of indices in August
Source: FE Analytics
The obvious guess as to why this is the case is the global volatility we have experienced in recent months. This came to a head on Monday, when the FTSE 100 had £74bn wiped off its value, the Dow Jones ended the day down 558 points and the Shanghai Composite dropped by 8.5 per cent.
In the past, gold has been seen as a safe haven because it is hard currency that is stored in vaults and cannot be printed. However, since the fall from its high in 2011, the yellow metal has tended to fail to rally in times of market stress.
Recent moves back into the commodity suggest the metal could once again be seen as a safe haven, according to Hermes. 
Credit analyst Andrey Kuznetsov said: “Gold has been a safe haven amid volatility, and China’s decision to make the fixing of the renminbi more representative of market-driven pricing has resulted in a sudden devaluation that surprised the market. The popularity of gold since this move indicates that investors still seek the precious metal in periods of uncertainty as a stable store of value.”
Richard Scott (pictured), senior fund manager at Hawksmoor, attributes this to gold’s hard currency standing among investors.
“There are lots of cross currents going on in the gold market and I think the reason why gold rallied a bit over the last month, even as virtually every other commodity price fell down very sharply, was because of this ultimate hard currency status,” he said.
“It’s a complex picture because we’re in a very unusual environment where we’ve seen many years of quantitative easing and record low interest rates and there have been worries about how we’re going to get out of this strange period.”
As such, Scott believes there is a place for gold within a portfolio as a risk diversifier against a loss of confidence in paper currencies. In particular, he says gold miners are the best bet at the moment.
Performance of index 2008 – 2011
Source: FE Analytics
However, he adds that miners are likely to move alongside the gold price as a lot of companies are close to break-even points in terms of production costs and the value of gold, which could either help or hinder a portfolio depending on how the spot price moves.
A headwind for the sector that cannot be ignored, according to the manager, is its dependence on emerging markets consumers.
“If you think about one of the key drivers behind the gold price during the big bull run up to 2011, it was very strong demand for gold from emerging markets and in particular China and India,” Scott explained.
“At the moment there’s a big worry in markets about whether there’s going to be an emerging market crisis and whether wealth creation in China and other emerging markets is going to weaken considerably.”
Kuznetsov points out that, while the two largest markets for gold are indeed China and India, they consist of 28 per cent and 24 per cent of the market shares respectively, which is far less than other commodity markets.
For instance, China accounts for 80 per cent of the market share in seaborne iron ore, 60 per cent in coal and 50 per cent in aluminium.
“The major end markets for gold are jewellery and investments, enabling the precious metal to provide investors with diversification from many other commodities, which depend on industrial and construction demand,” the analyst stated.
Performance of index in first half of 2015
Source: FE Analytics
The team at Capital Economics expects the commodity to start to shine again in the second half of the year, following early signs of a recovery in gold price.
“We believe that temporary factors played a big role in weakening gold demand in Q2 and expect the remainder of the year to be more positive for consumer demand,” the report said.
“While we acknowledge that the gold price could fall as low as $850 per ounce in a worst case scenario, our base case is that prices should find good support only a little below current levels (our end-Q3 forecast is $1,050) and will actually end the year higher, at $1,200.”
“That said, although we remain positive on the medium-term outlook, a strong recovery may still have to wait for markets to digest the first Fed rate hike.”
Despite a series of tailwinds seemingly on the horizon for the once-unloved commodity, Scott warns that the increase in the desirability of gold should be approached with caution.
“It’s very difficult to call whether the [gold] market will tighten or not. No one quite knows what the ramifications of what has happened in China and the devaluation of the renminbi is going to be. You can argue it either way – you could say that if you were someone in China who wants to protect the real value of their money then gold will become more attractive because of fear the currency will be devalued further,” he reasoned.
“Equally you could point out a devaluing currency means something that is priced in dollars, which gold is, would become ever more expensive so the buying demand of the Chinese would become less. It’s too early to know for sure and I think it’s dangerous to speculate on gold as to whether you think it’s going to go up or down over the short term and whether the market will tighten.”
“Its validity, or not, as an investment is more tied to the risk-diversifying characteristic it has as being the ultimate hard currency, and that has got some value given the level of uncertainty we face in the global economy at the moment.”
