Cookie policy

Heartwood's website uses cookies. By continuing to browse you are agreeing to our use of cookies. To find out more, please visit our cookie policy page.

For Wealth Management, please visit: handelsbankenwealth.co.uk

For Wealth Management, please visit: handelsbankenwealth.co.uk

Back to Latest thinking

Anxious bond markets have given gold the Midas touch. Will it last?

heartgb_gm_0805_1331-resized.jpg

Graham Bishop

Investment Director
5 min read

Throughout the summer, increasingly uneasy investors have flocked to bonds, pushing bond yields lower and lower. As we write, the level of negative yielding debt (where investors effectively pay to lend out their capital, if held to maturity) has ballooned to historic levels, above $16trn, amid ongoing trade war escalations and concerns about the outlook for global growth.

Bond markets have sent other signals of alarm too: in both the US and UK, the yield curve inverted in August, with yields on 10-year government bonds falling below those of 2-year bonds, meaning that investors required more compensation for lending out their capital over the shorter term than the longer term. This has historically been seen as a herald of recession (though without a specific timeline), and is certainly a signal of extreme near-term uncertainty.

Slim pickings in bond markets have had knock-on effects elsewhere in investment markets. The gold price has shown itself to be highly correlated to the rise in negative yielding debt, with risk-averse investors running to gold as one of the world’s oldest ‘safe haven’ assets. As a result, gold has had an extraordinary year so far, bolstered by investor anxieties in the market selloff in late 2018, and still climbing throughout the summer months. Indeed, gold was August’s best performing asset class.

At Heartwood, we have been adding to our gold holdings throughout the year, with healthy allocations across our strategies. For us, gold acts as a portfolio diversifier and a hedge in changeable market conditions, allowing us to keep risk (and the potential for reward) on the table elsewhere in the portfolio. However, we are mindful that – like all commodities – the price of gold can fluctuate rapidly. Given the current risks to the global economy, we remain comfortable in our bond holdings at present.

Nevertheless, we are mindful that gold is typically driven by the direction of real yields on bonds (the yield an investor can expect after allowing for inflation – rising inflation expectations usually lower the gold price), as well as the relative strength of the US dollar (a weaker dollar is good for gold). We therefore believe gold investors should closely watch for any announcements of economic stimulus ahead, such as by the European Central Bank at its September meeting, or perhaps by authorities in China in response to recent poor Chinese economic data, and consider the likely impact of that particular stimulus on growth, inflation expectations, and market confidence.

heartgb_gm_0805_1331-resized.jpg

About the author

Graham Bishop

Investment Director

Graham has been responsible for asset allocation since joining Heartwood in 2017. He also manages our Balanced Investment Strategy. Previously, Graham worked at Citi where he was the investment bank’s Global Macro Strategist from 2014 and held responsibility for Citi’s Global Asset Allocation views and Global Macro Strategy trade ideas. Prior to this, he worked as an Equity Strategist at Exane BNP Paribas and the Royal Bank of Scotland. Earlier in his career Graham worked for Cazenove Capital Management as an Economist and Multi Asset Strategist.

Graham studied economics at the University of Exeter and is a CFA charterholder.

To find out more and see Clear Thinking in action, get in touch