Gold is not a growth asset – so why is it going up?

Investment markets have had a few good months now. Growth slowly picking back up, rate cuts coming and whilst inflation may have stopped going down, it’s certainly not going up at the moment. This environment is historically good for risk assets, and both the S&P and FTSE100 are close to all-time highs. There will be blips and drops of course (and now I’ve sent this I’m sure I’ve jinxed it) but the environment remains positive for now. But how do we explain the rises in other “non-risk” assets that are not necessarily growth related?

Like Gold? Or Bitcoin?

I’ll leave Bitcoin for another day (you know I’ll be talking about it again soon ??), but I want to focus on Gold here.

Gold is not a positive growth asset. It’s defensive and a store of value. So why is it going up as well?

One theory is that global governments are buying it as store of value because they are worried the US may confiscate their USD like they did with Russia. Another interesting and unfashionable theory is debt and deficits. Yes, remember these? They used to be important many years ago, but don’t seem to get much airtime anymore.

The UK Government is not immune to the painful higher mortgage rates that many homeowners like me are now paying. When the UK issues it’s own bonds (Gilts) it sets a coupon rate that looks to match the base rate (5.25%) in order to make it competitive vs other bonds available in the market. Put simply, the coupon is the rate of interest the government must pay. The higher the rate, the higher the payment.

I found this chart from the UK Debt Management Office that puts this in context:

This is up to September 2023, and shows the average portfolio yield across ALL (this is not just current issues, but all debt) UK debt. You can see the average rates of 2% or 1% of the last 10 years are no more and it’s now more like 4%-5%. Whilst rates remain at this level, so too will this yield.

The US is similar – this chart below represents the total cost of US Treasury interest payments.

So what does this have to do with gold? Well, gold is a store of value. How does any government get out of higher debt, higher interest cycle?

They devalue. They can do this through letting inflation stay high or they can do this through monetization (as in asking the central banks to buy the debt back). Both of these reduce the value of ￡1 or $1 in your pocket as basically more money is printed. You can’t print Gold (or Bitcoin), which may well explain the solid support in both.

The expectation of more volatility

Another aspect of markets this year is how surprisingly un-volatile (I think that’s a word) they have been.

With a YTD return in the FTSE All-Share of 3%, we have only seen a 4% drop. This is much, much lower than the median 12.2% fall, and the other interesting part about this chart is that there are many examples of double-digit growth years (2019, 2016, 2023, 2009 to name a few) where the intra-year falls have been significant.

Upshot: The peace won’t last. It never does. Expect volatility. But when it comes, that doesn’t have to mean we are done for and we can (and should) expect markets to pick back up.

Carbon Dioxide emissions

Quick quiz

Since 1990 the amount of Carbon dioxide emitted by the UK is:

1. +47%
2. +27%
3. Flat
4. -47%

What’s your guess?

The answer is D) -47%

I think that’s fascinating and not what I guess most people expected.

However good news this may be, global emissions continue to increase, with China and India leading emissions, but even China are talking about trying to aim for carbon neutrality by 2060. The question will be: how much more will this line go up before then? And what will the implications be.

I’ll leave that discussion for another day…

Adam Walkom

My personal views only. Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest.