Gold bugs have faced a difficult few years after the yellow metal fell dramatically from its record highs during the eurozone debt crisis, while its critics have pointed out that it hasn’t acted like the safe haven it is supposed to be in the volatile markets of recent times.
The gold price peaked at over $1,900 an ounce in 2011 as investors fretted that the eurozone would be torn apart by the debt crises playing out in countries such as Greece, Portugal, Ireland and Spain. However, it fell sharply after that and investors have seemed reluctant to return to gold, even when volatility spiked in equity and bond markets.
The metal is currently trading at around $1,150 an ounce after witnessing a small rise in recent weeks – but this is still some 35 per cent below its 2011 record. It has risen over a number of trading sessions, even though some analysts had predicted another collapse in its price ahead of interest rate rises from the Federal Reserve.
Performance of gold spot index since Sep 2011
Source: FE Analytics
Nitesh Shah, research analyst at ETF Securities, notes that gold exchange traded funds are approaching four straight weeks of inflows, as investors became more confident that a rate rise has been pushed further into the distance.
“Gold responded positively as investors favour the hard monetary asset against the US dollar, a currency they feel is being debased the longer the policy setting remains ultra-low,” he said.
Other supporting factors include increasing Chinese gold imports and seasonal demand in India, although Shah points out that some investors have continued to trim holdings on the back of the Fed’s seeming commitment to lifting rates this year.
Julian Jessop, chief global economist at Capital Economics, says the recent performance of gold means it stands a chance of reaching his firm’s $1,200 end-of-2015 forecast, especially as the Fed is now widely expected to put off its first rate hike until next year.
“Nonetheless, gold has still not performed quite as well as might have been expected, given the renewed declines in US government bond yields and the dollar,” he added.
Jessup says that at least two additional factors are preventing gold from rising further amid the volatile risk asset environment and delays to interest rate rises.
The first, he argues, is the general negative sentiment been displayed towards all metals. Signs that the Chinese economy is slowing have pushed down prices in many industrial commodities, including metals.
The below graph shows the relationship between the gold and copper price over recent years; both have trended downwards together as more attention was placed on the health of the world’s second largest economy.
Performance of gold and copper over 3yrs
Source: FE Analytics
The second reason, according to Jessop, is a lack demand for inflation hedges. This is demonstrated by the decline in US breakeven inflation rates over 2015 (breakeven rates are the difference between the nominal yield on a bond and the real yield on an equivalent inflation-linked bond, giving a gauge of inflation expectations).
This factor can be attributed to the rise of deflationary forces in many parts of the economy, with notable sources of this include the very low oil price, lacklustre wage growth and falling producer prices in China. Consumer prices inflation in the US is just 0.1 per cent while in the UK it’s 0 per cent.
Jessop concluded: “However, we do not expect these headwinds for gold to last. Instead, we expect other metals to recover as the news from China improves, while inflation expectations should rebound as oil prices pick up and labour markets continue to tighten.”
“Indeed, headline inflation should snap back in most economies over the next few months as the big falls in oil prices in late 2014 drop out of the annual comparison. This should support further gains for the price of gold next year too – our end-2016 forecast is $1,400.” 
Tom Becket, chief investment officer at Psigma Investment Management, is one investor that has maintained a position in gold in spite of its difficult recent years and the derision it has attracted from some corners of the investment community.
“If gold is indeed a joke, then it hasn’t been a very funny one in the last few years. As many investments have performed well, gold has performed poorly,” he said.
“However, the future will not necessarily look like the past and there are obvious reasons why gold could arrest its miserable decline.”
Becket argues that rising interest rates will not be as bad for the metal as many fear given that the Fed will only be able to put them up at a “glacial pace” at best, which would alleviate the pressure on gold.
He adds that investor complacency over inflation is “misplaced” and says the inflation-proofing attribute of gold could prove very useful to a portfolio in the future.
Finally, he believes that the gold market is well balanced from a supply versus demand perspective and there could be scope for improving trends in the medium term.
While these factors would be supportive of the metal, they could also help gold mining companies – which have seen their share prices smashed by the negative sentiment towards the underlying commodity.
Performance of indices over 3yrs
Source: FE Analytics
“Gold miners look very attractive to us, although they are certainly a deeply contrarian investment,” Becket said. “Gold mining companies are doing a more efficient job with their balance sheets and capital allocation, making them more investable.”
However, gold is still far from loved by all members of the investment world. Julian Chillingworth, chief investment officer at Rathbones, is one investor with a cautious stance on the metal and the companies whose fortunes are linked to it.
“Gold has been below $1,200 an ounce for much of this year and its role divides investors. With real interest rates still low, prices are unlikely to rise in the short term. Gold mining equities come with additional risks,” he warned.
