Up next in 10
Gold has been used as a hedge against economic volatility and has traditionally remained stable - however, the precious metal has plummeted around 15% since the outbreak of the war in Iran.
Why are investors suddenly running for the exits and cashing in their gains? In this urgent breakdown, we reveal exactly why the precious metal is plunging, from panic selling and "hot money" fleeing the market, to the crushing impact of soaring interest rates.
City AM's Maisie Grice sits down with Investment Director at AJ Bell, Russ Mould, to get to the bottom of the price drop.
Timestamps
[00:00] The 15% Gold Crash Explained
[00:56] Why Panic Selling & "Hot Money" Are Tanking Gold
[02:00] Historical Bull Markets & Nasty Corrections
[02:49] Global Debt Crisis: $1.2 Trillion US Interest Bill
[04:47] War, Inflation, & Long-Term Investment Strategies
[06:09] Central Bank Moves: China Buying vs Turkey Selling
[07:05] How 5% Interest Rates Destroy Gold Demand
[10:04] The Hidden Energy Crisis Crushing Gold Miners
[11:58] Portfolio Hedging: Adapting to High Inflation
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0:00
Gold's has been a storming rally in the
0:01
past 2 years with investors flocking to
0:03
get their hands on the precious metal in
0:05
a bid to swerve economic and
0:07
geopolitical uncertainty, but this has
0:09
come screeching to a halt. The ongoing
0:12
conflict in the Middle East has thrown
0:13
gold's safe haven status into question
0:15
after the asset suffered a stark
0:17
sell-off. The price of gold has tumbled
0:19
by more than 15% since the start of the
0:21
Iran war, suffering a similar fate to
0:23
that of the stock and bond markets. The
0:25
asset has since becoming broad in the
0:26
conflict, dropping to around 4,550
0:30
dollars with investors cashing in their
0:31
gains and ignoring its ability to be a
0:33
hedge during times of uncertainty. But
0:36
why has gold lost its shine? Here to
0:38
discuss this with me is AJ Bell
0:39
Investment Director Russ Mould. Russ,
0:41
thank you for joining me.
0:42
>> Thanks for having me. I really
0:43
appreciate it. Not at all. So, I know we
0:44
just touched on then gold has dropped by
0:46
over 15% and this was really intriguing
0:49
to me because it's a safe haven asset.
0:50
The whole point of it is this is where
0:51
we go during times of uncertainty. So,
0:53
why has this conflict in particular
0:55
triggered this sort of sell-off?
0:56
>> Nothing's immune to a panic and I think
0:58
that's the first thing to bear in mind
1:00
is that if people do reach for liquidity
1:02
and look and they'll ultimately turn to
1:03
cash, they will go for where they can
1:05
find it and cash where they some of the
1:07
gold where some of them had fairly
1:08
substantial profits was a logical place
1:10
to look for some, I'm sure. Also, gold
1:13
there were look there was a big pile on,
1:14
let's face it, in the last 3 or 6
1:15
months. So, some of the hot money will
1:17
probably be frightened out or again look
1:19
to take evasive action. So, those are
1:20
probably the two of the major reasons
1:22
why. I can throw all sorts of other
1:23
things at you. Stronger dollar, higher
1:24
interest rate concerns, which increase
1:27
the the cost of carry of gold. So,
1:28
there's lots of different factors in
1:29
there, not one of them, but ultimately
1:32
nothing's immune if people are heading
1:33
for the exits. I was just what you were
1:34
saying about hot cash and maybe it's
1:36
like hot burning rush. Is it is that
1:38
coming from potentially investors who
1:39
maybe weren't familiar with the gold
1:41
market, but maybe thought everyone else
1:43
is doing it, should I do it as well? Is
1:44
that sort of triggering
1:45
>> It's a distinct possibility. If you look
1:46
at there have been three major gold bull
1:48
markets since 1970 and Nick when Nixon
1:51
smashed up Bretton Woods and took the US
1:52
dollar off the gold standard. In the
1:53
1970s bull market, there were three gold
1:56
bear markets where it fell by at least a
1:58
fifth. Yeah. In the 1980 in the 2000s
2:00
bear bull market, there were another two
2:03
bear markets within it where gold fell
2:04
by at least a fifth. And in this one,
2:06
this is the second bear market in gold.
2:08
It went down by 20% in 2022 when the Fed
2:11
raised interest rates. So, even within
2:13
those big massive runs that we got,
2:15
there were some very nasty corrections
2:17
because let's face it, bull markets will
2:18
do what they can to gold people and
2:20
throw you off and gold is no different
2:22
from all the others.
2:22
>> No, exactly. I think as you were saying,
2:24
the idea of safe asset, nothing is
2:25
immune. I mean, look at today, it's back
2:27
up around roughly 3%.
2:29
>> Yeah, I mean, if if if you're a gold
2:30
bug, yeah, why did you fundamentally own
2:32
it beforehand?
2:34
Some people may use it as a hedge
2:35
against inflation. Some people may use
2:37
it as a against central bank money
2:39
printing. Some people may just use it as
2:41
a hedge against central bank loss of
2:42
control. That's that's probably the big
2:44
one. Would you argue now that central
2:46
banks are absolutely on top of the
2:48
situation? I'm not entirely comfortable
2:51
and I think if you are of the view that
2:53
Western debts are proving very, very
2:55
difficult to service, the US annual
2:57
interest interest bill is now 1.2
2:59
trillion dollars. A quarter of the tax
3:01
take. The UK's last money monthly
3:03
borrowing figure
3:04
what, 14 billion pounds? 13 of that was
3:07
interest. So, you're in a very, very
3:09
difficult situation. Let's say we get
3:11
out a recession coming out as a result
3:13
of very high
3:14
falling gas prices. Okay, so your tax
3:16
revenues go down, your welfare spending
3:18
goes up and Rachel Reeves' head room
3:20
Yes. forget it. So, in that if you're a
3:23
gold bug and you were worried about um
3:26
government debts and how they deal with
3:27
them, then the war isn't in any way
3:30
going to change your mind. It's if
3:31
anything going to increase your
3:33
conviction levels and you're probably
3:34
going to be inclined to sort this out
3:35
because you're going to go back to the
3:36
argument of either they need to inflate
3:38
the debt away or they need to print
3:40
money to meet the bills and either way,
3:42
gold might still keep its shine. That's
3:44
if you're a gold bug.
3:45
>> It that's sort of like a similar
3:46
argument in regards to the stock market,
3:48
you know, we see it all the time. Trump
3:50
make comments that are quite quick and
3:52
you know, they haven't been no check
3:54
very frequently and sometimes the stock
3:55
market react, but what I've seen a bit,
3:56
I don't know if you've seen the same, a
3:58
lot of investors now have become sort of
3:59
seasoned to the ride it out. And would
4:01
you say that's the same with the gold
4:02
market and these gold bugs?
4:03
>> it's a way to stay sane, to be honest
4:05
with you. You really would not want to
4:06
be taking every single nuance on trust
4:09
because I think you're going to get
4:10
yourself very, very badly caught out.
4:12
You can see that in the volatility
4:13
you've seen in index like the VIX, for
4:14
example. So, yeah, definitely do keep a
4:17
long-term perspective. I know it sounds
4:19
boring, but there have been from a very
4:22
narrow perspective of stock markets in
4:23
the 1960s, 7, 8, 9, 10 conflicts. All
4:27
them very unpleasant, all of them we all
4:29
wanted them to end very quickly for
4:30
humanitarian reasons. This is just the
4:31
same, but their lasting impact upon
4:34
economic activity and share price was
4:36
pretty limited except
4:38
for the two oil price shocks of the
4:39
1970s and the Vietnam war, which kind of
4:42
again brought back these issues of
4:44
government spending, inflation, oil
4:46
shocks. So, those echoes are still there
4:50
and again, if you're a gold bug, you'll
4:52
be looking back at your gold with
4:53
interest and not changing your mind. If
4:55
you're a gold if you're not into gold,
4:57
you might not change your mind either
4:58
because you'll take the Buffet line that
4:59
it's a useless piece of metal that
5:02
frankly is tucked away in a safe and
5:04
serves no purpose whatsoever. So, you
5:06
what you might not be inclined to play
5:07
it.
5:08
That's really interesting as well. It's
5:09
pretty saying investing is a long-term
5:11
game. You've got to be willing to as you
5:14
were just saying then to deal with these
5:15
kind of shocks and the same here.
5:16
>> If you have a thesis, you've probably
5:18
written down five reasons why you own an
5:19
asset. Of So, okay, fine. Check which
5:21
ones of the which ones have changed in
5:22
the last month. The answer is probably
5:24
actually not desperately many. Maybe
5:25
higher interest rates for longer is
5:27
something that you'd be you'd be looking
5:29
at with a little bit of concern. But
5:30
will central banks really want to start
5:32
jacking interest rates up at a time when
5:34
the global economy is quite brittle,
5:35
government debts are very high?
5:36
>> Yeah. I'm not entirely convinced that
5:38
will be a long-term phenomenon. So,
5:40
again, don't let short-term price action
5:42
and dare I say panic deflect you from
5:44
what you think is a sound long-term
5:46
thesis.
5:46
>> Got you. Okay, yeah, that's interesting
5:48
to know. Coming back to central banks,
5:50
um
5:51
obviously, a few of them are now looking
5:53
to potential sell-offs. Poland was
5:55
really interesting to me, you know, the
5:56
central bank governor was saying we're
5:57
going to boost our reserve, we're going
5:59
to, you know, build up our gold reserve.
6:00
And now they're saying no, actually,
6:01
we're maybe not going to do that. We're
6:02
going to look at defense spending. So,
6:03
I'm really interested on your take on
6:05
this kind of conversation around central
6:07
banks just a little bit more.
6:08
>> It's a I mean, there has been huge
6:10
central bank buying over the last 2
6:11
years. You can see it in the World Gold
6:13
Council statistics. China has been a
6:15
massive buyer looking to diversify
6:17
assets away from US Treasuries and other
6:19
options. There was in fact a story today
6:21
that Turkey may be looking to sell some
6:23
of its gold reserves to so it's got more
6:25
currency with which to support the
6:27
plunging lira at a time of very high
6:28
inflation in
6:30
in that country. Um so, again, there are
6:32
always potential ebbs and flows. Gold's
6:35
central banks have been a big buyer,
6:36
they may start to sell, but I think
6:37
again, if you're a fundamental investor,
6:39
you will just look at that as maybe an
6:40
opportunity. If someone is a forced
6:41
seller, you might think actually that's
6:43
no bad thing because I can step in.
6:44
Yeah, definitely. And then just to look
6:46
as well, I know you mentioned higher
6:47
interest rates and again, that's really
6:49
again interesting and that's one of the
6:50
things that's somewhat been triggered by
6:51
this conflict.
6:53
The example, we were we were all
6:54
expecting it to lower, you know, that's
6:56
that was the that was the initial
6:57
estimation at the start of the year.
6:58
That seems to be no longer the case. How
7:01
will that depress the gold price? How
7:02
will that affect the market?
7:03
>> It'll increase the cost of ownership.
7:04
Okay, yeah. So, basically think for you
7:06
can buy a UK 5 10-year gilt and get
7:09
nearly 5% now.
7:10
>> Yeah, mhm. In risk-free nominal terms
7:14
because the UK hasn't defaulted on its
7:15
debts since 1672, then that's absolutely
7:18
fine. But the clearly so, therefore, you
7:20
think, okay, I'm going to get nothing
7:22
for owning gold, sticking it in a safe
7:23
or I can get 5% from a 10-year gilt. So,
7:25
you might think that's certainly one of
7:27
the reasons why people may lose a little
7:29
bit of interest in gold and look more
7:30
towards fixed income. But you still
7:32
clearly have to take into account other
7:33
factors such as inflation and the real
7:35
yield on the gilt and again, the
7:37
possibility that Western issuance of
7:40
gilts here in the UK or Treasuries in
7:41
the US
7:42
might not be going down. Yeah. No,
7:45
that's definitely I think a very key
7:46
point here that, you know, it's not an
7:48
isolated asset. The supply of gold is
7:50
what, 1 or 2% a year? gold grows 1 to 2%
7:52
a year. I mean, if they hit them if if
7:54
in a worst-case scenario, I'm sure any
7:56
central banker if asked today would deny
7:58
it flatly that that's an option, that
7:59
there was a the print button again and
8:00
go back to QE, then money supply will go
8:02
an awful lot more quickly than the gold
8:04
supply. And if you look at the research
8:05
that Merk Investments does, they
8:07
actually look at the price of the gold
8:09
stock relative to US money supply. They
8:11
actually argue that if gold was to peak
8:13
out at the same percentage as US supply
8:15
as it did during that in 1980, gold
8:17
would get to about 12,600 dollars an
8:19
ounce.
8:20
That's their maths, but they are
8:22
bullish. And for you, you know, I feel
8:24
like analysts are somewhat split down
8:25
the middle potentially about where does
8:27
the gold market look going forward now
8:29
in regards to if Trump's promises of a
8:32
ceasefire in the end of war are coming
8:34
or if that's just another thing that we
8:35
just need to wash over our heads. How
8:37
does this look?
8:38
>> You could easily see a lot more
8:39
volatility and if there is a rapid peace
8:41
which proves sustainable and frees up
8:44
the state of war moves and the oil price
8:47
and the oil pipeline damage is repaired
8:48
quickly and all the gas starts to flow,
8:51
and then and gilts and
8:52
Treasury expected yields start to come
8:54
down in expectation of those interest
8:56
rate cuts, then yeah, you could easily
8:57
see more volatility in gold. Of that,
9:00
there's absolutely no doubt at all. But
9:01
again, I'm thinking the long-term bugs
9:03
would think, we still know what's coming
9:04
here, which is a choice between,
9:07
you know, money printing, inflation or
9:08
some really, really nasty bad things
9:10
happening economy-wise because the debt
9:11
burden is so heavy.
9:13
>> Definitely. It it doesn't look like
9:14
anything from what I'm saying then what
9:15
we've seen. So, it's not going to lose
9:17
its safe haven status just for a little
9:19
well, not a little, but like, you know,
9:20
for the shock as you were saying. I
9:22
think the most fundamental thing that
9:23
would change perception for gold for the
9:24
worse
9:26
would be some real hair-shirt policies
9:27
from central banks and a and a and a
9:29
real determination to keep living
9:31
inflation, jack up rates and
9:34
a some form of resolution
9:37
Yeah. for Western government debts of
9:39
that doesn't involve So, if there was
9:41
decent economic growth, debt to GDP
9:43
ratios began to come down and Rachel
9:45
Reeves actually achieved her goal,
9:47
then yeah, that would I would think do
9:48
severe damage to the investment case for
9:49
gold very definitely.
9:51
>> Definitely. I I like that you mentioned
9:52
that as well. I like that you're not
9:53
just sticking with it being isolated.
9:54
The Iran war is such a nuanced asset,
9:56
there's so much to it in regards to what
9:58
how it looks going forward. Just we need
9:59
to remember that. Yeah, and even looking
10:01
at gold miners, I mean they massively
10:02
underperformed gold during the early
10:03
stages of its run-up. They then
10:05
outperformed it last year. Gold miners
10:07
have come down more than gold this year
10:08
because what is one of the biggest costs
10:11
of running a mine?
10:12
>> Mhm. Fuel and energy. Yeah. So, if you
10:15
look at 2007-8 when gold was starting to
10:17
motor, Mhm. gold miners crashed. Okay,
10:19
again, we had the global financial
10:21
crisis, so again, liquidity was king.
10:23
People sold sold what they could lay
10:24
their hands on, but also gold miners
10:26
all-in sustained costs went up very
10:28
quickly because of the cost of oil and
10:31
fuel. So, again, that's something to
10:32
bear in mind.
10:33
>> Yeah. Some
10:34
gold bugs like to play miners off
10:36
against Mhm. the metal and see which one
10:38
gives them more leverage at one one
10:39
time. Yeah. At the moment, it may
10:41
slightly feel if oil stays sustainably
10:43
high that you might get a little bit
10:45
more bang for your buck from the
10:46
underlying metal rather than take some
10:47
of the company-specific risk with the
10:48
miners because again, they had such a
10:50
thumping run last year.
10:51
>> Yeah, miners really interesting. Their
10:52
share prices some of them did drop when
10:54
their result didn't really well, off the
10:55
back of the worries of of production.
10:57
And I guess you argue that what was the
10:58
average all-in sustained cost for the
11:00
majors? About $1,800 to $2,000 an ounce.
11:02
So, that's probably you can argue a
11:03
floor for where gold could go.
11:05
>> Okay. I guess the if the cost of
11:07
producing it is that, then that's
11:08
probably what the thing's worth, you
11:09
could argue from an intrinsic point of
11:11
view. Right. Okay. Um
11:12
you could you you could argue. So, you
11:14
definitely keep an eye on what the gold
11:15
miners costs are cuz there is a chance
11:17
that they rattle. And you also with gold
11:19
miners, you have to look at where they
11:20
operate, the local geology, the local
11:22
weather, and the local politics in the
11:24
there is the risk of what used to be
11:25
called resource nationalism and the
11:27
local regimes understandably were seeing
11:29
Western companies getting very rich very
11:31
quickly and wanted their share of the
11:32
lot of that pie for that for the for the
11:34
Mhm. uh local taxation incomes. So,
11:36
that's always a a risky you have to bear
11:37
in mind as well. Definitely. I mean, and
11:39
just looking at all of us discussed
11:41
there, I mean,
11:43
we we know the market changes every day,
11:44
probably more now than ever. I mean, how
11:46
how how should people hedge their
11:48
portfolio going forward? You know,
11:51
what is this Where do we Where do we
11:53
take the risk? Where do we place Is it
11:55
day-to-day?
11:55
>> hung up on our day-by-day moves. Yeah,
11:58
keep informed, Mhm.
11:59
>> absolutely, but don't try and trade that
12:01
news cuz I think in the end you are
12:02
going to get yourself into an awful lot
12:05
of trouble. I think if you look at the
12:06
commodity
12:08
basket more widely. If you look at the
12:09
CRB commodities index,
12:11
>> Yeah.
12:12
I think it bottomed in 2021 and actually
12:15
since 2021, that index has outperformed
12:17
the FTSE All-World. It's not done it in
12:19
a straight line and nothing ever does go
12:21
up in a straight line. But if you take
12:23
the view that 2009 to 2021,
12:27
Yeah. you had low growth, low inflation,
12:29
low or zero interest rates.
12:30
>> Mhm. Okay. Is does the world feel the
12:32
same as that now? Yeah. Does it? Mhm. Uh
12:35
I'm not I'm not totally comfortable it
12:37
does. Yeah. So, if that's the case, why
12:39
would the investments that worked so
12:41
well in that low low low environment
12:43
work so well now? And low low low then
12:45
was all about tech, biotech,
12:47
long-duration assets, and bonds.
12:48
>> Mhm. So, if the environment's very
12:49
different now,
12:51
Yes. I'm not convinced they're going to
12:52
work as well. Listen, I mean,
12:53
particularly when valuations are so much
12:55
higher in many instances. Whereas what
12:56
didn't work then, but did work during
12:58
the previous period of inflation and
13:00
stagflation, cyclicals, value, Yeah.
13:02
commodities. So, if the world is
13:04
different and you're taking a big step
13:05
back and not getting caught in the
13:06
day-by-day,
13:07
>> Yeah. that's the big the biggest
13:09
investment decision you've got to make
13:10
now. Definitely. Is have we gone from
13:12
low growth, low rates of inflation to
13:14
high normal growth, higher inflation,
13:15
higher rates, or at least more
13:16
volatility in those cuz that's a major
13:18
asset allocation decision and that will
13:20
help shape whether you think commodities
13:22
are right for your portfolio. The fact
13:24
that they don't pay yield will put a lot
13:26
of people off, understandably. But I
13:28
think if you get that asset allocation,
13:30
that big picture view right, a lot of
13:31
other things will fall into place.
13:32
>> Definitely. Well, definitely a lot to
13:34
unpack there, but Ross, thank you so
13:35
much for joining me. I really appreciate
13:37
it. And for everything that you need to
13:38
know about the gold price and the Iran
13:40
war, stick with CityAM.com.
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