With the gold rally on pause, now is probably a good time to re-evaluate investments in the metal and the role it plays in portfolios. In our view, a significant rise in US real yields seems unlikely while economic uncertainty remains high, new Covid-19 infections are rising and plans for rapid vaccine deployment encounter some bottlenecks. But at the same time, neither are there strong reasons to expect a significant move to lower real yields, as the prospect of more economic stimulus lays a foundation for recovery expectations. 

The prospect of a new pandemic relief package in the US and eventual easing of lockdowns and resumption of activity should keep hopes for a strong economic recovery alive. Meanwhile, forecasts for higher nominal Treasury yields and US GDP growth that outpaces other developed markets should curtail US dollar depreciation. This reduces two key supports for the gold price.

The ongoing portfolio diversification benefit of gold also requires some scrutiny. The correlation between gold and equities has been uncomfortably high at between 0.5 and 0.6 since April last year*, although this should revert lower if gold drifts sideways or falls while equities rally further. As a result, investors with higher-than-average allocations to gold should ask whether it’s time to trim their exposure and reset gold to a portfolio insurance role. The lustre has faded. 

*Based on rolling 52 weekly returns.
Stuart Rumble

Stuart Rumble

Investment Director

Mark J Hamilton

Mark J Hamilton

Senior Graphic Designer