What is the performance of gold telling us?

The price of gold exceeded US$2,900 an ounce last week for the first time. Since October 2023, it has risen by more than US$1,000 an ounce. The price is three times higher than it was a decade ago. It has grown ten-fold since 2000. What is going on, where does it go from here and how best to invest?

Gold should not really be this high. Traditionally, the precious metal performs badly when interest rates rise. That is because, unlike bonds, shares, cash, or property, it does not pay investors an income. When the yields on those other assets are attractive, there is less incentive to hold ‘the barbarous relic’ as the economist John Maynard Keynes called gold. That is the case today, but still gold is hitting new records.

The gold price should also prefer a weak dollar. The metal is denominated in the US currency. When other currencies are strong versus the dollar, they can buy more gold. When they are weak against the greenback, they can buy less, and so the price should fall. Today’s Trump-fuelled strong dollar should be a headwind for the gold price. Clearly, it is not.

So, the performance of gold is telling us something else. The message it sends is that all is not well with the world. It says that investors are worried, and history shows that it is unwise to ignore the signals that gold sends at times of stress.

In the run-up to the financial crisis, for example, the S&P 500 rose strongly between the bottom of the dot.com bust in 2003 and the end of 2007. It nearly doubled in value in less than four years. But, over that period, it underperformed the gold price by around 40%. Gold investors did not trust what the stock market was telling them. And they were right.

So, why is gold so strong today? Several reasons. The first is gold’s perceived safe-haven qualities when the world looks uncertain. The election of Donald Trump has massively increased the unpredictability of US policy, on many fronts but notably on trade and tariffs. At the same time, gold is a hedge against inflation. Many Trump policies, not just tariffs, are likely to be inflationary. It is a perfect storm for gold.

Uncertainty goes right to the top. Central banks around the world are also hedging their bets. Ever since the invasion of Ukraine, and the sanctions that followed, countries such as Russia, China, India, and Turkey have been increasing their purchases of gold, in a bid to reduce their exposure to the US dollar. Gold has long been a store of value and a diversifier, without the credit risk associated with paper currency reserves. Central bank purchases exceeded 1,000 tonnes for the third year in a row in 2024.

Adding fuel to the fire last month was DeepSeek’s announcement that it could outperform OpenAI’s ChatGPT, at lower cost. At a stroke, this cast doubt on Silicon Valley’s assumed dominance in artificial intelligence. And with it, the fragile valuation of that crucial driver of the US stock market’s outperformance. Investors have accelerated their search for safer places to invest their money. Once again, gold has ticked the box.

One further reason to like gold is its growing use in a range of key industries of the future. This has never really been a key part of the case for gold because, at just 6 per cent of demand for the metal, industrial applications have been much less significant than jewellery (50 per cent), investment (23 per cent) and central bank buying (21 per cent). But its uses in nanotechnology, electronics, even the fight against malaria, mean this source of demand is growing.

With the price having moved so far, so fast, however, investors are right to question whether the gold ship has already sailed. Historically, the gold price moves in steps, rising rapidly and then consolidating or falling, often for many years. Might there be a better way to hedge against the uncertain outlook?

One that is receiving some attention now is gold’s less fashionable counterpart, silver. The two are similar - both precious metals, historically used as currencies - but they are also very different. More than half of the annual demand for silver comes from industrial uses, in myriad electronics applications - notably renewable energy, AI, and defence. Also, in the chemicals industry and in medical equipment - bacteria will not grow on silver. But, as with gold, macro drivers such as inflation and interest rates, geo-political stress, and policy shifts are an influence on the silver price.

There is around fifteen times as much silver under the ground as gold. And for many years, that simple equation governed the ratio of the two prices. More recently, however, the relationship between the two has changed dramatically. Today, the gold price is one hundred times that of silver. The preference for gold as a risk management tool justifies this in part, but it does not recognise the growing deficit between supply of and demand for silver. The price differential has widened significantly in the past decade. The traditional correlation between the two metals has broken down and gold looks overvalued compared to silver, which remains well below its recent peak.

There are only two sensible ways to invest in both gold and silver. Holding the physical metals is expensive, risky, and impractical. It is much easier to invest via an exchange-traded fund holding the metals themselves. Or by investing in the mining companies that dig the metals out of the ground. In theory this is a leveraged play on the price, but in practice the link between miners’ shares and the underlying commodity price is loose. A small holding of both metals, via a fund, could be considered a good approach.

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Please note that the views expressed in this article are my own.